study on due diligence requirements through the supply chain
TRANSCRIPT
Lise Smit, Claire Bright, Robert McCorquodale, Matthias Bauer, Hanna Deringer, Daniela Baeza-
Breinbauer, Francisca Torres-Cortés, Frank Alleweldt, Senda Kara and Camille Salinier and Héctor
Tejero Tobed
January – 2020
Study on due diligence
requirements through the supply chain
FINAL REPORT
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EUROPEAN COMMISSION
Directorate-General for Justice and Consumers
Directorate— A — Civil and Commercial Justice Unit— A.3 — Company Law
E-mail: [email protected]
European Commission B-1049 Brussels
EUROPEAN COMMISSION
3
Directorate General for Justice and Consumers
Study on due diligence requirements through the
supply chain
Final Report
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LEGAL NOTICE
Printed by the British Institute of International and Comparative Law in United Kingdom Manuscript completed in January 2020 First edition This document has been prepared for the European Commission however it reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.
The European Commission is not liable for any consequence stemming from the reuse of this publication.
Luxembourg: Publications Office of the European Union, 2020
© European Union, 2020 Reuse is authorised provided the source is acknowledged. The reuse policy of European Commission documents is regulated by Decision 2011/833/EU (OJ L 330, 14.12.2011, p. 39).
For any use or reproduction of photos or other material that is not under the copyright of the European Union (*), permission must be sought directly from the copyright holders.
PDF ISBN 978-92-76-15094-7 doi:10.2838/39830 DS-01-20-017-EN-N
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ACKNOWLEDGEMENTS The authors of this study are Lise Smit, Claire Bright, Robert McCorquodale, Matthias
Bauer, Hanna Deringer, Daniela Baeza-Breinbauer, Francisca Torres-Cortés, Frank
Alleweldt, Senda Kara and Camille Salinier, with case studies by Héctor Tejero Tobed.
Our sincere gratitude to Irene Pietropaoli for her valuable contributions, to Bradley
Dawson for the design and formatting, and to Anthony Wenton for proof-reading.
Country Reports were authored by Geert van Calster and Siel Demeyer (Belgium), Lia
Heasman (Denmark, Finland and Sweden), Elsa Savourey (France), Daniel Augenstein
(Germany), Shane Darcy (Ireland), Giacomo Cremonisi (Italy), Liesbeth Enneking
(Netherlands), Bartosz Kwiatkowski (Poland), Maria Prandi and Daniel Iglesias Márquez
(Spain) and Stuart Neely (United Kingdom).
The information and views set out in this study are those of the author(s) and do not
necessarily reflect the official opinion of the Commission. The Commission does not
guarantee the accuracy of the data included in this study. Neither the Commission nor
any person acting on the Commission’s behalf may be held responsible for the use which
may be made of the information contained therein.
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ABSTRACT This study for the European Commission focuses on due diligence requirements to
identify, prevent, mitigate and account for abuses of human rights, including the rights
of the child and fundamental freedoms, serious bodily injury or health risks,
environmental damage, including with respect to climate. It was conducted by the British
Institute of International and Comparative Law (lead), Civic Consulting and LSE
Consulting. Through desk research, country analyses, interviews and surveys it identifies
Market Practices (Task 1) and perceptions regarding regulatory options. The Regulatory
Review (Task 2), including twelve Country Reports, shows that UN Guiding Principles on
Business and Human Rights’ standard of due diligence is increasingly being introduced
into legal standards or proposed in Member States. The Problem Analysis, policy
background and intervention logic concludes with the definition of four options for
regulatory proposals (Task 3): No change (Option 1), new voluntary guidelines (Option
2), new reporting requirements (Option 3) and mandatory due diligence as a legal
standard of care (Option 4). Option 4 includes sub-options limited to sector and company
size, and enforcement through state-based oversight or judicial / non-judicial remedies.
The assessment of impacts of regulatory options (Task 4) considers economic impacts,
impacts on public authorities, social, human rights and environmental impacts.
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CONTENTS
LIST OF TABLES........................................................................................................... 12
LIST OF FIGURES ......................................................................................................... 13
EXECUTIVE SUMMARY (ENGLISH) ............................................................................ 15
NOTE DE SYNTHÈSE (FRANÇAIS) ............................................................................. 24
I. INTRODUCTION .................................................................................................... 35
1. Introduction................................................................................................ 35
2. Background ................................................................................................ 35
3. Scope and definitions ................................................................................... 37
3.1 Scope ........................................................................................... 37
3.2 Definitions ..................................................................................... 38
4 Methodology ............................................................................................... 40
5 General Overview ........................................................................................ 40
II. MARKET PRACTICES ............................................................................................ 44
1. Introduction................................................................................................ 44
2. Methodology ............................................................................................... 44
3. General survey data .................................................................................... 45
Business survey respondents ........................................................... 45 3.1
General survey respondents ............................................................ 46 3.2
4. Current due diligence practices ..................................................................... 48
Overview of current practices ........................................................... 48 4.1
Scope of due diligence .................................................................... 50 4.2
CASE STUDY: BASF AND VALUE-TO-SOCIETY .................................................................. 58
Language used to describe due diligence ........................................... 59 4.3
CASE STUDY: VATTENFALL AND LIMITING ENVIRONMENTAL DAMAGE ............................... 61
Due diligence practices in own operations .......................................... 63 4.4
Due diligence practices in supply and value chains .............................. 65 4.5
CASE STUDY: LUNDBECK AND AKORN: RESTRICTING PENTOBARBITAL FOR LETHAL INJECTIONS IN THE US ......................................................................................... 67
Traceability and the scope of the supply chain .................................... 70 4.6
CASE STUDY: MARKS & SPENCER AND MAPPING SUPPLY CHAINS ..................................... 71
CASE STUDY: HENNES & MAURITZ AND TRANSPARENCY IN THE SUPPLY CHAIN ................. 72
Audits ........................................................................................... 73 4.7
Leverage and the ability of individual companies ................................ 74 4.8
CASE STUDY: FAIRPHONE AND TRANSPARENCY IN COMMUNICATIONS .............................. 77
Communication with stakeholders and local experts ............................ 78 4.9
CASE STUDY: NESTLÉ AND NGO PARTNERING................................................................. 79
CASE STUDY: HUAYOU COBALT: ACKNOWLEDGING RISKS IN ARTISANAL AND SMALL-SCALE MINING ..................................................................................................... 81
Buying practices and an integrated approach ..................................... 83 4.10
CASE STUDY: BUYING PRACTICES AND THE FAIRTRADE MINIMUM PRICE FOR COCOA ......... 85
Remedies and grievance mechanisms ............................................... 86 4.11
CASE STUDY: THE BANGLADESH ACCORD AND WORKER SAFETY ...................................... 87
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Incentives for undertaking due diligence ........................................... 89 4.12
Digital technologies ........................................................................ 91 4.13
Overall views on current due diligence practices ................................. 92 4.14
5. Stakeholder views on impacts of regulatory options ......................................... 93
Option 1: No policy change (baseline scenario) .................................. 93 5.1
Option 2: New voluntary guidelines / guidance ................................... 97 5.2
Option 3: New regulation requiring due diligence reporting .................. 99 5.3
Option 4: Regulation requiring mandatory due diligence as a standard 5.4of care ........................................................................................ 105
Sub-options of Option 4 ................................................................ 121 5.5
Overall stakeholder views .............................................................. 141 5.6
6. Stakeholder views on effects of EU-level regulation ....................................... 142
Harmonisation ............................................................................. 142 6.1
Legal certainty ............................................................................. 144 6.2
Competitiveness and “levelling the playing field” .............................. 146 6.3
Non-negotiable standard to facilitate leverage .................................. 147 6.4
Access to the European market ...................................................... 149 6.5
The leadership of the EU ............................................................... 150 6.6
III. REGULATORY REVIEW ..................................................................................... 156
1. Introduction.............................................................................................. 156
2. Methodology ............................................................................................. 156
3. The concept of due diligence ....................................................................... 156
3.1 Due diligence as a legal standard of care ......................................... 158
3.2 Developments in due diligence ....................................................... 158
3.2.1 UN Guiding Principles on Business and Human Rights ....................... 158
3.2.2 OECD Guidelines for Multinational Enterprises .................................. 161
3.2.3 The ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (ILO MNE declaration) .......................... 164
3.2.4 Other international standards ......................................................... 165
3.2.5 EU-level standards and developments ............................................. 165
3.2.6 Domestic measures regulating due diligence in supply chains ............. 170
3.2.7 Case law ..................................................................................... 175
3.2.8 Due diligence in the Draft Treaty .................................................... 177
3.2.9 The usefulness and establishment of the concept of due diligence 179
3.3 Environmental due diligence and climate change .............................. 180
3.3.1 Environmental due diligence .......................................................... 180
3.3.2 Due diligence and climate change ................................................... 184
3.4 Due Diligence, sustainability and the SDGs ...................................... 189
3.5 Due Diligence and corruption ......................................................... 190
3.6 Due Diligence in the agricultural sector, including coffee, tea and cocoa subsectors .......................................................................... 191
3.7 Due Diligence for child labour......................................................... 191
4. Domestic frameworks ................................................................................ 192
4.1 Country reports: Twelve selected EU Member States ........................ 192
4.2 Other domestic developments ........................................................ 192
4.2.1 Switzerland ................................................................................. 193
4.2.2 Norway ....................................................................................... 195
4.2.3 Canada ....................................................................................... 196
4.2.4 Australia 196
4.2.5 United States of America ............................................................... 197
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4.2.6 Brazil 197
4.3 Overview and Comparative Analysis of Country Reports .................... 199
4.3.1 Introduction ................................................................................. 199
4.3.2 Areas of law ................................................................................. 200
4.3.3 The Legal Duty ............................................................................. 201
4.3.4 Scope ........................................................................................ 204
4.3.5 Transnational Application............................................................... 206
4.3.6 Corporate Groups ......................................................................... 207
4.3.7 Monitoring, Enforcement and Remedies ........................................... 209
4.3.8 Conclusions ................................................................................. 212
IV. PROBLEM ANALYSIS AND OPTIONS FOR REGULATORY INTERVENTION ........... 214
1. Introduction.............................................................................................. 214
2. Problem analysis ....................................................................................... 214
2.1 Adverse human rights and environmental impacts in global value chains, aggravated by their increasingly complex, dynamic and non-
transparent character ................................................................... 214
2.2 Lack of implementation of due diligence by companies, despite
existing voluntary and legally binding transparency and reporting requirements ............................................................................... 218
2.3 Failure of corporate risk assessment processes to extend beyond the risks of the company to those who are actually or potentially affected by its supply and value chain ......................................................... 221
2.4 Regulatory gap between existing legal framework and Member States’ obligations ................................................................................... 222
2.5 Increasing fragmentation of due diligence requirements across sectors, size of companies, countries, and area of application ............ 225
2.6 Lack of legal certainty about due diligence requirements for human rights and environmental impacts ................................................... 227
2.7 Lack of access to remedy for those affected by the adverse human rights or environmental impacts of EU companies ............................. 228
3. Legal basis for and policy background of a possible future EU intervention ........ 231
3.1 Legal basis for a possible future EU intervention ............................... 231
3.2 Policy background of a possible future EU intervention ...................... 232
3.3 Calls for mandatory due diligence at EU level based on legal and policy background ........................................................................ 234
4. Intervention logic of a possible future EU intervention .................................... 235
5. Regulatory options .................................................................................... 239
5.1 No policy change (baseline scenario) .............................................. 239
5.2 New voluntary guidelines/guidance (Option 2) ................................. 242
5.3 New regulation requiring due diligence reporting (Option 3) ............... 245
5.4 New regulation requiring mandatory due diligence (Option 4) ............ 250
6. Due diligence as a legal standard of care: Clarification of a few common questions ................................................................................................. 260
7. Further considerations around scope of application ........................................ 271
7.1 Accompanying non-binding guidance on the mandatory duty ............. 271
7.2 Regulation of transnational corporate activity: foreign-based subsidiaries, suppliers and third parties ........................................... 274
7.3 Implementation at Member State level ............................................ 276
7.4 Material scope of adverse human rights and environmental impacts ... 277
7.5 Conflict of laws considerations ....................................................... 278
7.6 Transitional period ........................................................................ 280
7.7 Mandatory due diligence as part of a package of measures ................ 280
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8. Discussion of strengths and weaknesses of the options identified .................... 281
V ASSESSMENT OF OPTIONS .................................................................................. 290
1. Literature Review ...................................................................................... 290
1.1 Economic Impacts ..................................................................................... 290
1.1.1 Company-level Costs .................................................................... 290
1.1.2 Company-level Benefits ................................................................. 301
1.1.3 Impact on Company-Level Competitiveness ..................................... 315
1.1.4 Impact on SMEs ........................................................................... 317
1.1.5 Industry and Aggregate Economic Impacts ...................................... 320
1.2 Social Impacts .......................................................................................... 320
1.3 Impacts on Human Rights .......................................................................... 324
1.3.1 Pre-Implementation Impact Assessment Review ............................... 325
1.3.2 Post-Implementation Impact Assessment Review ............................. 332
1.3.3 Benefits and Challenges of the Different Policy Approaches ................ 333
1.4 Environmental Impacts .............................................................................. 356
1.4.1 Pre-Implementation Impact Assessment Review ............................... 359
1.4.2 Post-Implementation Impact Assessment Review ............................. 366
1.4.3 Benefits and Challenges of Environmental Due Diligence ................... 368
1.5 Impact on Public Authorities ....................................................................... 374
2. METHODOLOGY .................................................................................................. 386
2.1 Economic and Social Impact Assessment ...................................................... 386
2.1.1 Economic Impacts: Company-level, sector- and economy wide impacts ....................................................................................... 386
2.1.2 Social Impacts in the EU and non-EU countries ................................ 388
2.1.3 Impacts on the public authorities in EU Member States ..................... 388
2.2 Human Rights and Environmental Impact Assessment ................................... 388
2.2.1 Impacts on Human Rights ............................................................. 388
2.2.2 Environmental Impacts ................................................................. 389
3. ANALYSIS .......................................................................................................... 390
3.1 Economic Impacts across Regulatory Options ................................................ 398
3.1.1 General remarks .......................................................................... 398
3.1.2 Company-level Costs .................................................................... 401
3.1.3 Company-level Benefits ................................................................. 448
3.1.4 Comparison of options and final assessment .................................... 470
3.2 Impacts on non-Economic spheres: Social, Human Rights and Environmental Impacts, and Impacts on Public Administration ............................................. 472
3.2.1 General remarks and description of impact areas ............................. 472
3.2.2 Assessment of impacts by policy option ........................................... 476
3.2.3 Comparison of options and final assessment .................................... 548
4. GLOBAL COMPARISON OF REGULATORY OPTIONS .................................................. 556
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List of Tables
Table 0.1: Major features and legal obligations of related regulations ..................................... 291
Table 0.1: Overview of options analysed in relevant EU impact assessments ........................... 295
Table 0.2: Summary of the costs by company for different costs types as estimated for the EU’s
Non-financial Reporting Directive ................................................................................ 299
Table 0.3: The impact of due diligence regulations on companies’ competitiveness................... 316
Table 0.4: The impact of due diligence regulations on SMEs .................................................. 319
Table 0.5: Potential social impacts resulting from disclosure and due diligence regulations ........ 322
Table 0.6. Impact Assessments carried out prior to the implementation of regulation with potential
human rights impacts ............................................................................................... 328
Table 0.7. Post-implementation Impact Assessments............................................................ 333
Table 0.8: Literature on Positive HR Impacts of Voluntary Due Diligence Approaches ................ 336
Table 0.9: Literature on Challenges of HR Impacts of Voluntary Due Diligence Approaches ........ 341
Table 0.10: HR Scope and Credibility of Voluntary Approaches .............................................. 343
Table 0.11: Literature on Positive HR Impacts of Mandatory Reporting Requirements as Due
Diligence Approaches ................................................................................................ 345
Table 0.12: Literature on Challenges of HR Impacts of Mandatory Reporting Requirements as Due
Diligence ................................................................................................................. 348
Table 0.13: Literature on Challenges of HR Impacts of Mandatory Due Diligence Approaches .... 352
Table 0.14: HR Scope of Mandatory Due Diligence Regulation ............................................... 356
Table 0.15. Impact Assessments carried out prior to the implementation of regulation with
potential environmental impacts ................................................................................. 362
Table 0.16. Post-implementation Impact Assessments .......................................................... 367
Table 0.17: Literature on beneficial environmental impacts ................................................... 369
Table 0.18: Literature on challenges to existing environmental due diligence ........................... 372
Table 0.19: Estimated economic cost for EU and MS public authorities from the EU Conflict
Minerals Regulation................................................................................................... 375
Table 0.20 Human resources available for the implementation and enforcement of the EUTR as
reported in the background synthesis report (FT: full time equivalent staff, PT: part time
equivalent staff) ....................................................................................................... 379
Table 0.21 Estimated costs for authorities in the Seveso III Impact Assessment ...................... 383
Table 0.22 Estimated impacts on public authorities in the Impact Assessment of the EU Directive
on the protection of the environment through criminal law ............................................ 385
Table 0.23 Expected costs for public authorities from criminal, administrative and civil law
approaches to addressing environmental crime in EFFACE synthesis report ...................... 386
Table 0.24 Overview of impact assessments of key regulations and covered impact areas ......... 392
Table 0.25: Respondents by size class and type of DD already undertaken .............................. 403
Table 0.26: Total number of person-days per month, by activity, median values ...................... 412
Table 0.27: Share of estimated “Cost of outsourcing / external services (including auditors &
experts)” in the estimated “Cost of labour” .................................................................. 415
Table 0.28: Respondents’ estimates for environmental and climate change due diligence: person-
days and costs ......................................................................................................... 416
Table 0.29: Number of enterprises in the EU28, by size class ................................................ 419
Table 0.30: Labour costs per hour in EUR, annual data of 2018 ............................................. 421
Table 0.31: Firm-level cost based on revenues approximation: large companies with more than
250 employees ......................................................................................................... 424
Table 0.32: Firm-level cost based on revenues approximation: companies with up to 249
employees ............................................................................................................... 425
Table 0.33: Additional firm-level cost as percentages of revenues, large companies vs. SMEs .... 427
Table 0.34: Overview of estimated additional labour cost excl. overhead and cost of outsourced
activities / audits, large companies vs. SMEs ................................................................ 428
Table 0.35: Overview of estimated additional labour cost incl. overhead and cost of outsourced
activities / audits, large companies vs. SMEs ................................................................ 429
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Table 0.36: Estimated additional firm-level cost, EU aggregate .............................................. 430
Table 0.37: Overview of sectors: mining and extraction industries, food products and agricultural
commodities, textile industries – NACE Level 3 ............................................................. 432
Table 0.38: Total of annual firm-level costs for Sub-option 4.1: mining and extraction industries,
food products and agricultural commodities, textile industries, EU aggregates .................. 436
Table 0.39 Top 30 of countries with greatest human rights risks and EU28 import volumes ....... 440
Table 0.40 Respondents’ replies regarding distortion of competition due to more equal standards
for EU & non-EU suppliers .......................................................................................... 443
Table 0.41: Expected additional benefits from current DD activities ........................................ 454
Table 0.42: Expected additional benefits from Option 2 ........................................................ 456
Table 0.43: Expected additional benefits from Option 3 ........................................................ 458
Table 0.44: Expected additional benefits from Option 4 ........................................................ 460
Table 0.45: Potential impact of mandatory DD on small companies’ revenues and profit margins,
by sector, approximated annual cost of mandatory DD based on “alternative total costs”
(median data) .......................................................................................................... 467
Table 0.46: Current human rights and environmental due diligence practices .......................... 481
Table 0.47. Overview of the main areas of social impact where positive impacts are expected
(Option 2) ............................................................................................................... 484
Table 0.48: Specific impacts by human rights area ............................................................... 489
Table 0.49: Specific impacts by environmental area ............................................................. 492
Table 0.50: Overview of the main areas of social impact where positive impacts are expected
(Option 3) ............................................................................................................... 497
Table 0.51. Specific human rights impacts by area (Option 3) ............................................... 502
Table 0.52: Specific impacts by environmental area (Option 3) .............................................. 507
Table 0.53: Overview of the main areas of social impact where positive impacts are expected
(Option 4) ............................................................................................................... 511
Table 0.54: Overview of total employment in the EU by sector (in thousand persons) ............... 514
Table 0.55: Potential employment effects, EU28 .................................................................. 516
Table 0.56: Potential employment effects resulting for new mandatory DD throughout companies’
value chains, if applied only to large EU companies (>250 employees) ............................ 517
Table 0.57: Specific impacts on human rights areas (Option 4) .............................................. 528
Table 0.58: Specific impacts by environmental area (Option 4) .............................................. 538
Table 0.59: Average labour costs (EUR), in 2018 based on EU-28 .......................................... 542
Table 0.60: Expected costs for public authorities from criminal, administrative and civil law
approaches to addressing environmental crime in EFFACE synthesis report ...................... 546
Table 0.61: Summary of respondents’ perceptions about human rights impacts by area ........... 551
Table 0.62: Summary of respondents’ perceptions about environmental impacts by area .......... 554
Table 0.63: Overview of regulatory options and impacts by area ............................................ 559
List of Figures
Figure 0.1: Development of number and allocation of person-days by policy option, all business
respondents (in person-days per month) ..................................................................... 405
Figure 0.2: Development of number and allocation of person-days by policy option, total of
companies with 1000+ employees (in person-days per month) ...................................... 407
Figure 0.3: Development of number and allocation of person-days by policy option, companies
with 1,000+ employees that already conduct “Human rights due diligence which takes into
account all human rights (including environment)” (in person-days per month) ................ 408
Figure 0.4: Development of number and allocation of person-days by policy option, companies
with 50-1,000 employees that already conduct “Human rights due diligence which takes into
account all human rights (including environment)” ....................................................... 409
Figure 0.5: Development of number and allocation of person-days by policy option, companies
with 0-49 employees (in person-days per month) ......................................................... 410
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Figure 0.6: Total estimated person-days, large companies (1000+ employees) that already
conduct “Human rights due diligence which takes into account all human rights (including
environment)” .......................................................................................................... 414
Figure 0.7: Impact Chain for Benefits from Due Diligence Activities ........................................ 453
Figure 0.8: Due diligence language referring to human rights and environment ....................... 480
Figure 0.9. Human rights and environmental aspects covered by companies’ due diligence ....... 482
Figure 0.10: Expected social impacts for Option 2 ................................................................ 483
Figure 0.11: Expected human rights impacts ....................................................................... 487
Figure 0.12: Expected environmental impacts under Option 2 ............................................... 491
Figure 0.13: Expected social impacts for Option 3 ................................................................ 494
Figure 0.14: Expected human rights impacts under Option 3 ................................................. 500
Figure 0.15: Expected environmental impacts under Option 3 ............................................... 506
Figure 0.16: Expected social impacts under Option 4 ............................................................ 509
Figure 0.17: Expected human rights impacts under Option 4 ................................................. 527
Figure 0.18: Expected human right impacts by economic sector under Option 4 ...................... 531
Figure 0.19: Expected human rights impacts by company size under Option 4 ......................... 532
Figure 0.20: Expected environmental impacts under Option 4 ............................................... 536
Figure 0.21: Expected environmental impacts by economic sector under Option 4.................... 539
Figure 0.22: Expected environmental impacts by company size under Option 4 ....................... 540
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EXECUTIVE SUMMARY (English)1
1. Background
This is a study for the European Commission DG Justice and Consumers on due diligence
through the supply chain, undertaken by the British Institute of International and
Comparative Law (BIICL) in partnership with Civic Consulting and LSE Consulting.
The mandate for this study derives from Action 10 of the European Commission Action
Plan on Financing Sustainable Growth of 8 March 2018,2 to:
[C]arry out analytical and consultative work with relevant stakeholders to assess:
(i) the possible need to require corporate boards to develop and disclose a
sustainability strategy, including appropriate due diligence throughout the supply
chain, and measurable sustainability targets; and (ii) the possible need to clarify
the rules according to which directors are expected to act in the company's long-
term interest. [Italics added]
The mandate further derives from the May 2018 European Parliament Report on
Sustainable Finance, which calls for a “legislative proposal” for “an overarching,
mandatory due diligence framework including a duty of care to be fully phased-in within
a transitional period and taking into account the proportionality principle”. 3
The concept of due diligence relevant to this study, to “identify, prevent, mitigate and
account for” adverse corporate impacts on human rights and the environment, was
introduced by the UN Guiding Principles on Business and Human Rights (“UNGPs”),4 and
incorporated into the OECD Guidelines for Multinational Enterprises (“OECD Guidelines”)5
to extend to other areas of responsible business conduct such as the environment and
climate change, conflict, labour rights, bribery and corruption, disclosure and consumer
interests,6 as well as in the ILO Tripartite declaration of principles concerning
multinational enterprises and social policy (“MNE Declaration”).7 It is also the foundation
for the French Duty of Vigilance Law, which requires “reasonable vigilance measures” as
a standard of care for human rights and environmental harms, and which the European
Parliament report states should be the basis for the “pan-European framework”.
This study is an initial study for the possible development of regulatory options at the EU
level.
2. Market Practices (Task 1) The methodology for the collection of evidence on market practices consisted of surveys,
interviews, case studies, and desktop and legal research of relevant materials.
1 For brevity, this Executive Summary summarises the content of the study with only limited footnoted references. For
references, please see the Main Report or Synthesis Report. 2 Action 10 of the Communication from the Commission to the European Parliament, the European Council, the Council, the
European Central Bank, the European Economic and Social Committee and the Committee of the Regions Action Plan:
Financing Sustainable Growth, COM/2018/097 final, 8 March 2018. 3 European Parliament Report on Sustainable Finance, 2018/2007(INI) at para 6. 4 UN Office of the High Commissioner for Human Rights “Guiding Principles on Business and Human Rights: Implementing the
‘Protect, Respect and Remedy’ Framework” (“UNGPs”), HR/PUB/11/04, 2011. 5 OECD Guidelines on Multinational Enterprises, 2011 6 OECD Guidelines ibid Commentary on General Policies at para 14. 7 ILO, Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, Adopted by the Governing Body
of the International Labour Office at its 204th Session (Geneva, November 1977) and amended at is 279th (November 2000),
295th (March 2006) and 329th (March 2017) Sessions (“MNE Declaration”).
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The 334 business survey respondents ranged from all sectors, and represented
enterprises of all sizes. Business respondents operated across the EU and the world, with
only 15.32% of respondents indicating that they only operate within the EU, and at least
40 respondents operating in each Member State.
The 297 general survey respondents (including business associations and industry
organisations, civil society, worker representations or trade unions, legal practitioners
and government bodies) similarly provided a representative and balanced sample.
General survey respondents indicated that their work covers all sectors and company
sizes. The largest group indicated that their work is not sector-specific or that it spans
across sectors. All EU Member States were selected by general survey respondents as
being relevant to their work.
Just over one-third of business respondents indicated that their companies undertake
due diligence which takes into account all human rights and environmental impacts, and
a further one-third undertake due diligence limited to certain areas. However, the
majority of business respondents which are undertaking due diligence include first tier
suppliers only. Due diligence practices beyond the first tier and for the downstream value
chain were significantly lower. The vast majority of business stakeholders cover
environmental impacts, including climate change, in their due diligence, although the
term “climate change due diligence” for a self-standing process is currently rarely used,
and human rights and climate change processes often take place in “silos”.
The most frequently used due diligence actions include contractual clauses, codes of
conduct and audits. Divestment was the least selected due diligence action by both
business and general respondents.
When asked about the primary incentives for undertaking due diligence, business
respondents and industry organisations selected the same top three incentives as being:
reputational risks; investors requiring a high standard; and consumers requiring a high
standard. Presumably because of the existing lack of regulatory or legal requirements to
undertake due diligence, business and industry organisation respondents indicated that
regulation or legal requirements are currently, or have been in the past, the least
selected incentives for companies to undertaking due diligence. In contrast, general
stakeholders and civil society respondents viewed regulatory incentives as the top
incentives for due diligence.
Survey respondents indicated that the current legal landscape (Option 1) does not
provide companies with legal certainty about their human rights and environmental due
diligence obligations, and is not perceived as efficient, coherent and effective.
Interviewees across business and other stakeholders agreed that there is already enough
voluntary guidance (Option 2) in existence, and survey respondents overall seemed
unconvinced that new voluntary guidance would have notable social, environmental and
human rights impacts. In contrast, survey respondents from industry organisations
expressed a preference for voluntary guidelines, drawing attention to the influential
nature of existing soft law mechanisms. Stakeholders however suggested that voluntary
guidance could be helpful to supplement and clarify any legal obligations, particularly
relating to the specificities of certain sectors or issues.
Survey respondents were more positive about the likely sustainability impacts of new
regulatory reporting requirements (Option 3). Perceived shortcomings stated by survey
respondents were that reporting requirements do not usually provide for effective
sanctions for non-compliance, and do not substantively require appropriate due diligence
for compliance with the regulatory obligation. It was nevertheless highlighted that
reporting requirements in this area have had a positive impact in raising awareness, and
that some are relatively new.
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The majority of stakeholders indicated that mandatory due diligence as a legal standard
of care (Option 4) may provide potential benefits to business relating to harmonization,
legal certainty, a level playing field, and increasing leverage in their business
relationships throughout the supply chain through a non-negotiable standard. The level
playing field and legal certainty were amongst the most important considerations for
business interviewees, whereas general interviewees highlighted its potential to address
the lack of access to remedies for affected parties and improve implementation of due
diligence. Almost all interviewees were in principle in favour of a policy change to
introduce a general standard at the EU level, although they differed on aspects of liability
and methods of enforcement. However, industry organisation survey respondents were
overall not in favour of the introduction of new policy changes, including mandatory due
diligence.
Within this option, the overall preference appears for a general cross-sectoral regulation,
but which takes into account the specificities of the sector, and the size of the company
in its application to specific cases. Survey respondents expressed an overall preference
for a standard which applies regardless of size, but views varied in this respect: many
noted a concern about the potential burden for SMEs, whilst other argued that many of
the risks in their supply chain relate to the activities of SMEs.
Stakeholders further indicated that the legal mechanism should be based on a standard
of care rather than a procedural (frequently described as “tick box”) requirement, and
they indicated that a company should be able to avoid legal liability by showing that it
has undertaken the due diligence required in the circumstances (the due diligence
defence). Interviewees also highlighted that mandatory due diligence laws should form
part of a “smart mix” of measures. Some stakeholders remarked that a transitional
period would be helpful. A few interviewees indicated that an EU-level regulation linked
to legal requirements for operating in or access to the European market would be a
powerful incentive. Many stakeholders emphasized the global importance of the EU
leadership in this area.
It is also noted that, increasingly, individual multinational companies support the
introduction of mandatory due diligence regulation, although there is no agreement on
the form of liability and enforcement mechanisms. In contrast, the majority of industry
organisation survey respondents appear to be in favour of the least enforceable
regulatory options. In this respect, industry organisation’s views on regulatory options
are contradictory to those of individual multinational companies on some of these key
questions.
Stakeholders across the spectrum seemed to be in consensus, with many expressing
strong views, that the UNGPs concept of due diligence should not be abandoned for
something that is more "vague". Instead, stakeholders suggested that any regulatory
mechanism should build upon the influence and strength of the due diligence concept of
the UNGPs.
3. Regulatory Review (Task 2)
The study reviewed the regulatory framework applicable to due diligence for human
rights and environmental impacts internationally, in the EU as well as in some non-EU
jurisdictions, and in 12 selected Member States through Country Reports by legal
experts.
18
The UNGPs state that in order to meet their responsibility to respect human rights,
business enterprises should carry out human rights due diligence8 to “identify, prevent,
mitigate and account for”9 actual or potential adverse human rights impacts a company
may be involved in through its own activities or business relationships. This responsibility
applies regardless of size, sector or where the company operates.10 The UNGPs refer to
the value chain (not the supply chain),11 and extends the responsibility to those impacts
that “the business enterprise may cause or contribute to through its own activities, or
which may be directly linked to its operations, products or services by its business
relationships”.12 The concept of leverage is used to determine whether the company has
taken “appropriate action” in circumstances where it may contribute or be directly linked
to an impact.13 Leverage is “considered to exist where the enterprise has the ability to
effect change in the wrongful practices of an entity that causes a harm”.14 The UNGPs
state that human rights due diligence should be ongoing (not once-off), context-specific
(not a one-size fits all “tick-box”), and cover all human rights,15 although certain risks
may be prioritised based on severity.16 Risks should be defined as risks to rights-holders
(i.e. people and the planet), thereby extending beyond risks to the company.17
The influence of the UNGPs is evident in the widespread adoption of the concept and
terminology of due diligence in other subsequent standards. For example, the OECD
Guidelines for Multinational Enterprises,18 were revised in 2011 to align with the
UNGPs,19 and its guidance on Responsible Business Conduct incorporates a similar
standard of due diligence as the UNGPs, including application "in all stages of the supply
chain or value chain".20 The OECD Guidelines extend the concept of due diligence
expressly to other areas of responsible business conduct, including environment and
climate change, as well as risks related to conflict, labour rights, bribery and corruption,
disclosure and consumer interests.21 OECD member states are required to set up
National Contact Points (“NCPs”), to which complaints may be made that a company is in
breach of the OECD Guidelines.
The EU has instituted a number of initiatives imposing certain due diligence-related
obligations for human rights and environmental impacts, including climate impacts.
Sector-specific examples include the EU Timber Regulation (“EUTR”)22 (which predates
the UNGPs), as well as the EU Conflict Minerals Regulation,23 which will come into force
on 1 January 2021. The EU has also adopted the EU Non-Financial Reporting Directive,24
which requires reporting on due diligence, and is accompanied by Non-Binding
8 UNGPs 15-21. 9 UNGP 15. 10 UNGPs 14 and 23. 11 UNGP 13 and its Commentary. 12 UNGP 17. 13 UNGP 19 and its Commentary. 14 Commentary to UNGP 19. 15 UNGP 17 and its Commentary. 16 Ibid. 17 UN Human Rights Council, “Report of the Special Representative of the Secretary-General on the issue of human rights and
transnational corporations and other business enterprises: ‘Protect, Respect and Remedy: a Framework for Business and Human Rights’”, A/HRC/8/5, 7 April 2008, at para 6. 18 OECD Guidelines above n 5. 19 John Ruggie and Tamaryn Nelson, “Human Rights and the OECD Guidelines for Multinational Enterprises: Normative
Innovations and Implementation Challenges“, Corporate Social Responsibility Initiative Working Paper No. 66 (May 2015) at
13. 20 OECD “OECD Guidelines for Multinational Enterprises: Responsible Business Conduct Matters” (“OECD RBC Guidance”),
available at: http://mneguidelines.oecd.org/MNEguidelines_RBCmatters.pdf at 61. 21 OECD Guidelines above n 5Commentary on General Policies at para 14. 22 Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market (“EU Timber Regulation”). 23 Regulation (EU) 2017:821 of the European Parliament and of the Council of 17 May 2017 laying down supply chain due
diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected
and high-risk areas (“EU Conflict Minerals Regulation”). 24 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 (“EU Non-Financial Reporting
Directive”).
19
Guidelines on non-financial reporting,25 and the recent Supplement on corporate climate-
related information reporting.26
Various domestic legislative measures address supply chain due diligence, but they are
often sector- or issue-specific. The 2017 French Duty of Vigilance Law27 is the only
legislative example to date which imposes a general mandatory due diligence
requirement for human rights and environmental impacts. As this law is new, there are
not yet any court judgments to clarify how this law will be interpreted and applied, but
the first legal actions have just been instituted.28 The 2019 Dutch Child Labour Due
Diligence Law requires due diligence for child labour,29 and the 2015 UK Modern Slavery
Act30 requires reporting on due diligence for modern slavery and human trafficking.
There are also currently pending proposals or campaigns for mandatory human rights
and environmental due diligence laws in 13 European countries, including 11 EU Member
States. Other existing domestic laws with due diligence requirement include those
relating to anti-corruption laws, product safety, public procurement, anti-money
laundering, and directors’ duties. Due diligence requirements are also contained in the
Revised Draft of the UN Business and Human Rights Treaty.31
As there is currently no general duty on companies to undertake due diligence for their
human rights and environmental harms in most EU jurisdictions, case law has developed
various possible avenues to bring claims for adverse human rights and environmental
harms in indirect ways, including in tort, criminal law, and consumer protection laws. A
few claims to date have been instituted against companies for climate change
contributions.
Recent developments are clarifying the content of due diligence requirements for
companies’ climate change impacts, many of which took place as this study was being
undertaken. In particular, in April 2019 the Netherlands OECD National Contact Point for
the first time clarified concrete ways in which companies’ individual due diligence actions
can include targets to address climate change.32 Reference was made to the relevant
company’s steps in terms of the Paris Agreement on climate change.33
4. Problem Analysis and Regulatory Options (Task 3)
This task consisted of an analysis of the problems, an intervention logic and the
identification of the possible regulatory intervention options at EU level.34
Option 1: No policy change (baseline scenario)
25 European Commission, Guidelines on non-financial reporting (methodology for reporting non-financial information) (2017/C
215/01). 26 European Commission, Guidelines on non-financial reporting: Supplement on reporting climate-related information (2019/C
209/01). 27 Loi no. 2017-399 du 27 Mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre 28 See Regulatory Review, section 3.2.6. 29 Kamerstukken I, 2016/17, 34 506, A. See Regulatory Review and Netherlands Country Report. 30 Section 54 of the UK Modern Slavery Act 2015. See Regulatory Review and UK Country Report. 31 UN Human Rights Council open-ended intergovernmental working group on transnational corporations and other business
enterprises with respect to human rights (“OEIGWG”), “Legally Binding Instrument to Regulate, in International Human Rights
Law, the Activities of Transnational Corporations and Other Business Enterprises”, 16 July 2019, (“Revised Draft”), available
at: https://www.ohchr.org/Documents/HRBodies/HRCouncil/WGTransCorp/OEIGWG_RevisedDraft_LBI.pdf 32 The Netherlands National Contact Point for the OECD Guidelines for Multinational Enterprises, Oxfam Novib, Greenpeace
Netherlands, BankTrack and Friends of the Earth Netherlands (Milieudefensie) versus ING, Final Statement, 19 April 2019,
available at: https://www.oecdguidelines.nl/documents/publication/2019/04/19/ncp-final-statement-4-ngos-vs-ing. 33 See Paris Agreement on Climate Change, available at: https://unfccc.int/process-and-meetings/the-paris-
agreement/d2hhdC1pcy. 34 Further considerations identified as relevant to the introduction of a new regulatory intervention are discussed in the full
report and include the possibility of accompanying non-binding guidance, the regulation of transnational corporate activity, the
application to corporate groups and the supply chain, implementation at Member State level, material scope relating to the
definition of human rights and environmental impacts, potential conflict of laws, and a transitional period.
20
This option would entail no changes in regulation at EU level for companies on
undertaking due diligence through the supply chain. It is expected that current national
level developments will continue to result in mandatory due diligence legislation in at
least some Member States.
Option 2: New voluntary guidelines / guidance
This option would entail new voluntary guidelines at EU level for companies on
undertaking due diligence through the supply chain. Voluntary guidelines are by their
nature not usually legally enforceable but may influence the standard expected of
companies.
Option 3: New regulation requiring due diligence reporting
This option would entail new regulation at EU level requiring companies to report on the
steps they have taken to identify, address, prevent and mitigate any adverse human
rights and environmental impacts in their own operations or of third-party business
relationships (including the supply chain or value chain).35 This option may differ from
the EU Non-Financial Reporting Directive with regard to level of detail and transparency
required, and an express focus on risks to people and the planet rather than materiality
to shareholders.
Option 4: New regulation requiring mandatory due diligence as a legal duty of
care
This option would entail a new mandatory due diligence requirement at EU level which
would require companies to carry out due diligence to identify, prevent, mitigate and
account for actual or potential human rights and environmental impacts in their own
operations and supply or value chain36, as a legal duty or standard of care. It would allow
for a company to demonstrate, in its defence, that it has met this standard by undertaking
the level of due diligence required in the particular circumstances, i.e. this would be a
context-specific risk-based approach. The due diligence standard would allow for
prioritisation of those risks which are the most “severe”,37 the “most significant”,38 or the
most “salient”.39
Sub-option 4.1: New regulation applying to a narrow category of business
(limited by sector)
This sub-option would entail a substantive legal duty to meet a standard of due diligence,
applicable only to a certain sector or commodity.
Sub-option 4.2: New regulation applying horizontally across sectors
In terms of this sub-option, the above new mandatory due diligence regulation (Option
4) would apply across all sectors, either (a) to a defined set of large companies; (b) to
all companies regardless of size and so including SMEs, or (c) a general duty for all
companies plus an additional duty for large companies only.
Sub-option 4.2(a): applying only to a defined set of large companies
35 This will depend on the scope of the regulatory intervention. The title of the study in terms of the TOR refers to supply chain
but the scope of the mandate described therein envisions an application to the entire value chain. Survey respondents were
provided with definitions when asked about details relating to their “upstream supply chain” and “downstream value chain” respectively. 36 Ibid. 37 UNGP 17(b). 38 OECD Guidelines above n 5Chapter II, Commentary at para 16. 39 Shift and Mazars, “UN Guiding Principles Reporting Framework with implementation guidance”, available at:
https://www.ungpreporting.org/wp-content/uploads/UNGPReportingFramework_withguidance2017.pdf at 22.
21
This would entail a general legal duty to undertake due diligence (Option 4), applicable only
to a certain defined set of large companies.
Sub-option 4.2(b): applying to all business, including SMEs.
This sub-option would entail a general legal duty to undertake due diligence (Option 4),
applicable to all companies, including SMEs.
Sub-option 4.2 (c): general duty applying to all business plus specific additional
obligations only applying to large companies
This sub-option is would entail a general due diligence duty applying to all business
(including SMEs) plus an additional specific obligation applicable only to large companies.
By way of one example, this could take the form of a general due diligence duty applying to
all business, (including SMEs), plus an additional obligation linked to climate change targets
for large companies.
Sub-option 4.3: Sub-options 4.1 and 4.2 accompanied by a statutory oversight
and/or enforcement mechanism
In order to be mandatory, the above new mandatory due diligence regulation (Option 4)
would need to be accompanied by an oversight and/or enforcement mechanism. This
sub-option considers two sub-sub-options for the enforcement and oversight of such a
mechanism, namely (a) through judicial or non-judicial remedies, or (b) through a State-
based oversight body and sanctions for non-compliance. These two sub-sub-options are
not mutually exclusive and could both apply to the same instrument.
Sub-sub-option 4.3(a): mechanisms for judicial or non-judicial remedies
This sub-sub-option would consist of the above new mandatory due diligence regulation
(Option 4) accompanied by mechanisms for judicial and non-judicial remedies for those
affected by the company’s failure to exercise due diligence.
Sub-sub-option 4.3(b): State-based oversight body and sanction for non-
compliance
This sub-option would consist of the above new mandatory due diligence regulation
(Option 4) accompanied by a State-based oversight body and sanctions for non-
compliance. Oversight and enforcement bodies (often called administrative bodies) can be
created at EU and/or Member State level, within existing state departments, or by newly
established bodies. Enforcement mechanisms could include fines, the appointment of
monitors, withdrawal of licences or trade concessions, or even the dissolution of the
company. However, none of these enforcement mechanisms include remedy to the victim,
although this could be expressly provided for in addition to the State-based oversight.
5. Assessment of Options
The assessment of the regulatory options was undertaken by LSE Consulting, based on a
literature review and an assessment of the survey results. It combines quantitative and
qualitative approaches, and aims to discuss and assess, at this preliminary stage,40
possible costs and benefits of the different regulatory options in the following areas:
economic impacts; social impacts; environmental impacts; impacts on human rights;
40 This is only a preliminary study of regulatory options and not a full-scale impact assessment accompanying a regulatory
proposal. As such, the following impact assessment should be taken as a general discussion of potential impacts which could
arise if and when a new regulation is designed.
22
and impacts on public authorities in the EU.41 It is important to point out that the various
stakeholders had different experiences of laws, some of which relate to due diligence
reporting and administrative requirements (and not a standard of care). The lack of
existing comparative legislative examples resulted in varying expectations among survey
respondents.
The quantifications of economic impacts are based on person-day estimates that were
given by the surveyed business respondents for each of the four main regulatory
options. Generally, businesses’ estimates indicate that the number of required person-
days, and related costs respectively, would increase moderately with a shift from the
status-quo to new reporting requirements, and increase more substantially with a shift
from the status-quo to mandatory due diligence. We estimate that the total EU 28
additional annual company-level cost impact (labour cost, overhead and cost of
outsourced activities) would be proportionally highest for policy Option 4, with variations
depending on company size and sector depending on scope of application.
The impact on competition and innovation is difficult to assess ex-ante. Generally, no
significant distortions in intra-EU competition are expected if all companies that operate
in the EU are governed by the same set of regulations. While EU companies might be at
a relative disadvantage in cost competitiveness compared to non-EU companies,
additional firm-level costs as percentages of companies’ revenues are relatively low
compared to, for example, the applied average tariff for goods imported to the EU.
Therefore, no significant negative distortions for EU exporters that result from increased
recurrent administrative cost are expected. Business survey respondents expect
significant benefits or very significant benefits through decreased distortions, if the new
EU regulation creates more equal standards for EU and non-EU suppliers.
Moreover, stakeholders indicated various disadvantages which they experience from the
current lack of regulation in terms of the status quo, which they expect to improve if a
general duty is introduced at EU level. These benefits include an improvement in
competiveness through the levelling of the playing field, so that competitors, peers,
suppliers and third parties will be subjected to the same standard, as well as increasing
leverage with third parties in the value chain through the introduction of a non-
negotiable standard. These benefits are difficult to quantify at this stage, but should be
borne in mind, given that they could be significant, and were raised by business
stakeholders as one of the most important reasons for the introduction of a mandatory
due diligence requirement.
Similarly, business respondents indicated that reputational risk is their top incentive to
undertake due diligence under the current status quo. It is expected that these existing
reputational risks may be reduced through the introduction of a general due diligence
duty. Accordingly, it is likely that the most significant reputational benefits from a
mandatory due diligence requirement may result from a reduction in existing
reputational risks.
Digitalisation and new technology tools hold the potential to provide unprecedented
solutions to identify, address and eliminate human rights infringements and
environmental challenges. However, these technological advancements have not been
taken into consideration by the vast majority of the respondents.
Cost impacts on public authorities in terms of Options 2 and 3 are expected to remain
limited. The additional costs for the monitoring of the implementation of the regulation
under Option 4 are expected to be significant, especially if enforcement is to take place
41 Due to the relative newness of comparable laws which require due diligence as a legal standard of care, it has proven
challenging to find impact assessments which have been carried out for similar legislation, and where these were found they
did not necessarily include information and/or data which could be used for this analysis.
23
at Member State or EU level (sub-option 4.3(b)). By comparison, judicial remedies as
foreseen in sub-option 4.3(a) are likely to have significantly less additional costs for
Member States, insofar as these costs would fall within existing budgets for courts and
the judicial system.
Options 2 and 3 are expected to have only a minor positive social impacts. Since these
options only provide new guidance or require reporting but do not substantively require
companies to take any due diligence measures, it is not expected that substantial
additional measures would be taken by companies to address social matters. Both
options are also expected not to have any major negative or positive impacts on
employment levels. Social impacts from Option 4 are expected to be most significant
because the regulatory options require due diligence practices. However, the magnitude
and the type of social impacts depends on the design and application of the new
regulation, on the social issues which are addressed by the regulation, as well as on the
effectiveness of the enforcement mechanisms.
Similarly, the human rights and environmental impacts from Option 4 are expected to be
most significant, with positive impacts dependent on proper monitoring and
enforcement. However, when comparing Options 2 and 3, respondents foresee voluntary
guidelines to be more effective than reporting requirements in delivering positive
impacts. The expected positive results are consistent with previous EU assessments.
24
NOTE DE SYNTHÈSE (Français)42
1. Contexte
Cette étude sur le devoir de diligence dans les chaînes d'approvisionnement a été
réalisée par le British Institute of International and Comparative Law (BIICL), en
partenariat avec Civic Consulting et LSE Consulting, sur requête de la Commission
européenne et plus particulièrement de la Direction générale de la justice et des
consommateurs.
Le mandat relatif à cette étude émane de l’Action 10 du Plan d’action de la Commission
européenne sur le financement de la croissance durable du 8 mars 2018,43 qui prévoit
que:
La Commission procèdera à des analyses et à des consultations auprès des
parties intéressées, pour évaluer: i) l'éventuelle nécessité d'imposer aux conseils
d'administration l'obligation d'élaborer une stratégie de croissance durable,
prévoyant notamment l'exercice d'une diligence appropriée tout au long de la
chaîne d'approvisionnement, et des objectifs mesurables en matière de durabilité,
et l'obligation de la publier; et ii) l'éventuelle nécessité de clarifier les règles en
vertu desquelles les administrateurs sont censés agir dans l'intérêt à long terme
de l'entreprise. [Italique ajouté].
Le mandat émane également du Rapport du Parlement européen de mai 2018 sur la
finance durable qui invite la Commission à élaborer une « proposition de loi » visant à
mettre en place « un cadre général et obligatoire de diligence raisonnable comprenant un
devoir de vigilance à mettre en place progressivement dans les limites d’une période de
transition et en tenant compte du principe de proportionnalité. » 44
Le concept de diligence raisonnable dont il est fait référence dans le cadre de la présente
étude vise un ensemble de procédures permettant aux entreprises d'« identifier, de
prévenir, d'atténuer et de rendre compte » des incidences négatives qu'elles peuvent
avoir sur les droits de l'homme et sur l'environnement, tel qu'il a été introduit par les
Principes directeurs de l’Organisation des Nations Unies relatifs aux entreprises et aux droits de l’homme (« Principes directeurs des Nations Unies »)45 et intégré dans les
Principes directeurs de l'Organisation de coopération et de développement économique
(OCDE) à l'intention des entreprises multinationales (« Principes directeurs de
l’OCDE »),46 où il a été étendu à d'autres domaines tels que l'environnement et le
changement climatique, l'emploi et les relations professionnelles, la lutte contre la
corruption, les pots-de vin et autres formes d'extorsion, et les intérêts
des consommateurs, ainsi que dans la Déclaration de principes tripartite sur les
entreprises multinationales et la politique sociale de l'Organisation Internationale du
Travail (OIT) (« Déclaration de l'OIT sur les entreprises multinationales »).47 Il constitue
également le fondement de la loi française sur le devoir de vigilance qui exige des entreprises la mise en place des « mesures de vigilance raisonnables » en tant que
42 À des fins de concision, cette note de synthèse présente un abrégé de la teneur de l’étude et les notes de bas de pages sont
limitées. Pour obtenir les références complètes, veuillez vous reporter au Rapport principal ou au Rapport de synthèse. 43 L’Action 10 de la Communication de la Commission au Parlement européen, au Conseil Européen, au Conseil, à la Banque
centrale européenne, au Comité économique et social européen, et au Comité des régions. Plan d'action: financer la croissance
durable, COM(2018)97 final, 8 mars 2018. 44 Rapport du Parlement européen sur la finance durable (2018/2007(INI) au paragraphe 6. 45 Haut-Commissariat aux droits de l’homme de l’ONU « Principes directeurs relatifs aux entreprises et aux droits de l’homme »
mettant en œuvre le cadre « Protéger, respecter et réparer » HR/PUB/11/04 2011 46 OCDE, Principes directeurs de l'OCDE à l'intention des entreprises multinationales, 2011. 47 OIT, Déclaration de principes tripartite sur les entreprises multinationales et la politique sociale, Adoptée par le Conseil
d'administration du Bureau International du Travail à sa 204e session (Genève, novembre 1977) et amendée à ses 279e
(novembre 2000) 295e (mars 2006) et 329e (mars 2017) sessions.
25
norme de conduite, et qui, selon le rapport du Parlement européen, pourrait former le
fondement du « cadre paneuropéen ».
La présente étude constitue une étude initiale en vue du développement éventuel
d’options réglementaires en la matière au niveau européen.
2. Pratiques du marché (Tâche 1) La méthodologie employée pour cette partie de l'étude a reposé sur des enquêtes, des
entretiens et des études de cas, ainsi que sur une recherche documentaire des
ressources pertinentes ayant permis d'identifier les pratiques des entreprises en matière
de diligence raisonnable.
S'agissant des 334 répondants à l’enquête destinée aux entreprises, ils sont constitués
de professionnels provenant d'entreprises de toutes tailles et de tous secteurs d'activité.
Ces entreprises exercent des activités à la fois dans l’UE et dans le monde. Seuls
15,32 % des répondants à cette enquête ont indiqué que leurs entreprises ne déploient
d'activité qu'au sein de l’UE, et au moins 40 répondants ont indiqué que leurs entreprises
déploient une activité dans chacun des États membres de l'UE.
S'agissant des 297 répondants à l’enquête générale, ils sont constitués de membres
d'associations d’entreprises et d'organisations industrielles, de membres de la société
civile, de représentants des employés ou syndicats, d'avocats et d'organismes
gouvernementaux et forment également un échantillon représentatif et équilibré. Ces
répondants ont indiqué que leur travail couvre tous les secteurs d'activité et concerne
des entreprises de toutes tailles. La majorité des répondants ont précisé que leur travail
n’est pas spécifique à un secteur en particulier, mais qu’il englobe plusieurs secteurs. Les
répondants à l’enquête générale ont sélectionné tous les États membres de l’UE comme
étant pertinents pour leur travail.
A peine plus du tiers des répondants à l’enquête destinée aux entreprises ont indiqué
que leurs entreprises mettent en place des procédures de diligence raisonnable couvrant
les incidences négatives relatives à l'ensemble des droits de l’homme et l’environnement,
tandis qu'un autre tiers a précisé que leurs entreprises limitent leur exercice de la
diligence raisonnable à certains domaines particuliers. Une majorité de répondants à
l’enquête destinée aux entreprises n'incluent dans leur exercice de diligence raisonnable
que leurs fournisseurs de premier rang. Les pratiques en matière de diligence
raisonnable allant au-delà du premier rang et incluant les entités situées en aval de la
chaîne de valeur sont nettement plus rares. La très grande majorité des parties
prenantes issues des entreprises incluent les impacts environnementaux, et notamment
ceux liés au changement climatique, dans leurs procédures de diligence raisonnable bien
que la « diligence raisonnable en matière de changement climatique » en tant que
processus autonome soit rarement utilisée en l'état actuel et que les mesures de
diligence raisonnable relatives aux droits de l’homme et celles relatives au changement
climatique soient souvent réalisés de manière parallèle.
Les clauses relatives aux droits de l'homme insérées dans les contrats
d'approvisionnement, les codes de conduite et les audits figurent parmi les mesures les
plus communément mises en oeuvre par les entreprises dans le cadre de l'exercice de
leur diligence raisonnable. Le recours au désinvestissement a été la mesure la moins
sélectionnée aussi bien par les répondants à l’enquête destinée aux entreprises que par
les répondants à l’enquête générale.
Quant aux incitations principales à la mise en oeuvre de mesures de diligence
raisonnable, les trois mêmes réponses ont été sélectionnées par les répondants à
l’enquête destinée aux entreprises et les organisations industrielles, à savoir, les risques
réputationnels, les exigences des investisseurs et les exigences des consommateurs en
26
faveur d'un standard plus élevée. Les répondants à l’enquête destinée aux entreprises et
les organisations industrielles ont indiqué accorder une importance moindre aux
incitations d'ordre législatives et réglementaires, vraisemblablement en raison du
manque d'exigences réglementaires ou législatives en la matière. À l’inverse, les parties
prenantes de l'enquête générale et les répondants de la société civile ont considéré que
les incitations législatives et réglementaires figuraient parmi les principales motivations
de nature à conduire les entreprises à mettre en oeuvre des mesures de diligence
raisonnable.
Les répondants aux deux types d'enquêtes ont indiqué que le cadre normatif actuel
(Option 1) ne fournit pas aux entreprises de sécurité juridique quant à leurs obligations
de diligence raisonnable en matière de droits de l’homme et de l’environnement, et n’est
pas perçu comme efficace, cohérent et rationnel.
Les personnes interrogées parmi les entreprises et les autres parties prenantes
partagent le point de vue qu’il existe déjà suffisamment de lignes directrices d'ordre
volontaire (Option 2) et les répondants à l’enquête ont semblé, de manière générale,
peu convaincus que l'élaboration de nouvelles lignes directrices volontaires pourrait avoir
des impacts significatifs au niveau social, environnemental et en matière de protection
des droits de l’homme. À l'inverse des autres parties prenantes, les répondants issus
d'organisations industrielles ont fait part de leur préférence pour des lignes directrices
volontaires, attirant l’attention sur le caractère influent des mécanismes existants de
droit mou. Un certain nombre de parties prenantes ont suggéré que des orientations
volontaires pourraient utilement venir compléter et éclaircir de nouvelles obligations
contraignantes en termes de devoir de diligence des entreprises relativement à sa mise
en oevre dans le cadre de certains secteurs ou de certains enjeux particuliers.
Les répondants à l’enquête ont été plus positifs à propos des possibles impacts des
nouvelles exigences réglementaires en matière de transparence (reporting) (Option 3).
Les limitations perçues par les répondants à l’enquête ont permis de comprendre que les
exigences actuelles en matière de transparence ne prévoient généralement pas de
sanctions efficaces en cas de non-respect, et ne requièrent pas la mise en oeuvre de
procédures de diligence raisonnable. Il a été néanmoins mis en lumière que les
obligations de reporting qui sont, pour la plupart, relativement récentes, ont eu un
impact positif en ce qu'elles ont permis une sensibilisation accrue aux incidences
négatives sur certains sujets particuliers.
La majorité des parties prenantes ont indiqué que l'introduction au niveau européen d'un
devoir légal de diligence des entreprises en tant que norme de conduite (Option 4) serait
de nature à fournir des avantages potentiels pour les entreprises en termes
d’harmonisation, de sécurité juridique, de règles du jeu équitables, et de pouvoir
d'influence accru sur leurs relations commerciales au sein de leurs chaînes
d'approvisionnement par le biais de l'introduction de normes non-négociables. Les règles
du jeu équitables et la sécurité juridique font partie des motivations les plus importantes
pour les personnes interrogées parmi les entreprises, tandis que les personnes
interrogées parmi les autres parties prenantes ont mis en exergue le potentiel d'une telle
option dans le cadre de l'amélioration de l'accès aux recours pour les personnes
affectées, et l'amélioration de la mise en œuvre des obligations de diligence raisonnable.
La quasi-totalité des personnes interrogées s'est montrée favorable à un changement
réglementaire visant à introduire un devoir de diligence des entreprises au niveau
européen, quand bien même leurs points de vue ont pu diverger sur les aspects
concernant la responsabilité juridique des entreprises en cas de dommage et les
mécanismes de mise en œuvre. A l'inverse, les répondants à l'enquête générale issus
d'organisations industrielles ne se sont généralement pas montrés favorables à un
changement réglementaire, et notamment à l'introduction d'un devoir de diligence
contraignant.
27
Dans le cadre de cette dernière option, la préférence générale se dessine en faveur d'une
réglementation transsectorielle qui prendrait néanmoins en compte les spécificités du
secteur et la taille de la société dans le cadre de sa mise en oeuvre. Les répondants à
l’enquête ont fait part de leur préférence générale pour une norme susceptible de
s’appliquer à l'ensemble des entreprises, quelle que soit la taille, bien que les opinions
varient à ce sujet: un certain nombre de personnes ont indiqué leur préoccupation quant
à la charge potentielle d'une telle réglementation pour les petites et moyennes
entreprises (PME), tandis que d’autres ont fait valoir que de nombreux risques afférents
à leur chaîne d'approvisionnement sont liés aux activités des PME.
Les parties prenantes ont en outre indiqué que le devoir de diligence doit faire référence
à une norme de conduite et non à une exigence procédurale (souvent décrite comme un exercice de « cochage des cases») et elles ont indiqué qu’une entreprise devrait pouvoir
s'exonérer de sa responsabilité juridique en démontrant avoir mis en oeuvre la diligence
raisonnable requise aux vues des circonstances (défense de diligence raisonnable). Les
personnes interrogées ont également souligné que toute loi relative au devoir de
diligence devrait faire partie d’un « assortiment judicieux » de mesures. Certaines parties
prenantes ont remarqué qu’une période de transition serait utile. D'autres ont indiqué
qu’une réglementation au niveau européen liée à des exigences juridiques en termes
d'opérations sur le marché européen, ou d'accès au marché européen pourrait constituer
une puissante incitation au respect de la règlementation. De nombreuses parties
prenantes ont souligné l’importance globale du leadership de l’UE dans ce domaine.
On soulignera que, individuellement, les entreprises multinationales sont de plus en plus
nombreuses à soutenir l’introduction d'un devoir de diligence, même si des divergences
d'opinions se font jour en ce qui concerne le régime de sanction pouvant l'accompagner.
A l'inverse, la majorité des répondants à l'enquête générale issus d'organisations
industrielles ont indiqué une préférence pour les options réglementaires les moins
contraignantes. À cet égard, les points de vue des organisations industrielles sur les
options réglementaires contredisent donc fréquemment celles des entreprises
multinationales prises individuellement.
Un consensus de l'ensemble des parties prenantes semble se dégager (avec un grand
nombre d'opinions particulièrement énergiques sur ce point), quant au fait que le
concept de diligence raisonnable des principes directeurs des Nations Unies ne devrait pas être abandonné au profit d'un autre concept plus « vague ». Les parties prenantes
ont suggéré que tout nouveau mécanisme réglementaire au niveau européen devrait
s'appuyer sur le concept de diligence raisonnable des principes directeurs des Nations-
Unies afin de tirer parti de leur influence considérable.
3. Étude réglementaire (Tâche 2)
Cette partie de l'étude a passé en revue le cadre normatif ayant trait à la diligence
raisonnable en matière de droits de l'homme et de protection de l'environnement à
laquelle sont tenues les entreprises, à la fois au niveau européen et international ainsi
qu'au niveau domestique, et plus particulièrement dans 12 Etats membres de l'UE
analysés dans le cadre de rapports d'experts, ainsi que dans certains pays hors de l'UE.
Les Principes directeurs des Nations Unies prévoient que, pour s'acquitter de leur
responsabilité en matière de respect des droits de l’homme, les entreprises doivent faire preuve de diligence raisonnable en matière de droits de l'homme48 afin d'« identifier, de
prévenir, d'atténuer et de rendre compte» des incidences potentielles ou effectives sur
les droits de l'homme dans lesquelles elles peuvent avoir une part que ce soit par le biais
48 Principes directeurs N°15 -21
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de leurs propres activités, ou du fait de leurs relations commerciales.49 Cette
responsabilité qui incombe aux entreprises de respecter les droits de l'homme s'applique
à toutes les entreprises, indépendamment de leur taille, de leur secteur ou du contexte
local au sein duquel elles opèrent.50 Les Principes directeurs des Nations Unies font
référence à la chaîne de valeur (et non pas à la chaîne d'approvisionnement),51 et
étendent la responsabilité de l'entreprise aux incidences négatives sur les droits de
l'homme que l'« entreprise peut avoir ou auxquelles elle peut contribuer par le biais de
ses propres activités, ou qui peuvent découler directement de ses activités, produits ou services par ses relations commerciales ».52 Le concept d’influence est utilisé afin de
déterminer les "mesures nécessaires" qui doivent être prises par l'entreprise lorsqu'elle
contribue à une incidence négative sur les droits de l'homme, ou que cette incidence est
directement liée à son activité, ses produits ou ses services par sa relation commerciale
avec une autre entité.53 L'entreprise est considérée comme exerçant un tel pouvoir d'influence lorsqu'elle « a la capacité d'apporter des changements aux pratiques illicites
d'une entité qui commet un abus».54 Les Principes directeurs des Nations Unies indiquent
que la diligence raisonnable en matière de droits de l’homme doit s'exercer en
permanence (et ne pas être un événement exceptionnel), être adaptée au contexte
spécifique de l'entreprise (et ne pas se réduire à un exercice uniformisé consistant à
cocher des cases) et couvrir l'ensemble des droits de l’homme,55 bien que certains
domaines où le risque d'incidences négatives sur les droits de l'homme est le plus
important puissent bénéficier d'un ordre de priorité pour l'exercice de la diligence
raisonnable.56 La diligence raisonnable en matière de droits de l'homme doit couvrir les
risques encourus par les titulaires de droits (c’est à dire, les parties prenantes et la
planète) et donc s'étendre au-delà des risques auxquels l'entreprise est elle-même
exposée.57
L’influence considérable des Principes directeurs des Nations-Unies est manifeste aux
vues de l’adoption répandue du concept de diligence raisonnable dans les normes
internationales qui ont été adoptées par la suite. Par exemple, les Principes directeurs de
l’OCDE ont été mis à jour en 2011 afin de s'aligner sur les Principes directeurs des
Nations-Unies,58 et le guide OCDE sur le devoir de diligence pour une conduite
responsable des entreprises se fonde sur un standard de diligence raisonnable similaire à
celui retenu par les Principes directeurs des Nations-Unies, et qui s'étend «à tous les
niveaux de la chaîne d'approvisionnement ou de la chaîne de valeur de l'entreprise».59
Les Principes directeurs de l’OCDE ont étendu le concept de diligence raisonnable à
d'autres domaines tels que l'environnement et le changement climatique, l'emploi et les
relations professionnelles, la lutte contre la corruption, la sollicitation de pots-de-vin et
autres formes d'extorsion, et les intérêts des consommateurs.60 Les gouvernements
adhérents aux Principes directeurs de l’OCDE sont tenus de mettre en place des Points de contact nationaux (« PCNs ») chargés de répondre aux saisines pour non-respect des
principes directeurs de l’OCDE.
L’UE a pris un certain nombre d’initiatives qui imposent certaines obligations de diligence
raisonnable aux entreprises pour leurs impacts négatifs sur les droits de l’homme et
l’environnement, y compris leurs impacts sur le climat. On peut citer à titre d'exemple de
49 Principe directeur N° 15 50 Principes directeurs N° 14 et 23. 51 Principe directeur N° 13 et son commentaire 52 Principe directeur N° 17 53 Principe directeur N° 17 et son commentaire. 54 Commentaire du principe directeur 19 55 John Ruggie, « Protéger, respecter et réparer: un cadre pour les entreprises et les droits de l’homme», 7 avril 2008,
A/HRC/8/5 au paragraphe 8. 56 Principe directeur N° 17 et son commentaire 57 OCDE, Principes directeurs de l'OCDE à l'intention des entreprises multinationales, 2011. 58 John Ruggie et Tamaryn Nelson, « Human RIghts and the OECD Guidelines for Multinational Enterprises: Normative
Innovations and Implementation Challenge», Mai 2015, Corporate Social Responsibility Initiative Working Paper No. 66, p. 13. 59 OCDE, Principes directeurs de l'OCDE à l'intention des entreprises multinationales, 2011, paragraphe 14.p. 40. 60 OCDE, Guide OCDE sur le devoir de diligence pour une conduite responsable des entreprises, 2018, p. 68
29
règlementations sectorielles, le règlement établissant les obligations des opérateurs qui
mettent du bois et des produits dérivés sur le marché (EUTR) 61 (qui est entré en vigueur
préalablement à l'adoption des Principes directeurs des Nations-Unies), ainsi que le
règlement relatif aux minerais provenant de zones de conflit,62 qui entrera en vigueur le
1er janvier 2021. L'UE a également adopté la directive concernant la publication
d'informations non financières,63 ainsi que ses lignes directrices non contraignantes sur
l'information non financière,64 et son récent supplément relatif aux informations en
rapport avec le climat.65
Diverses mesures législatives nationales comportent des obligations de diligence dans les
chaînes d'approvisionnement, mais elles demeurent généralement spécifiques à un
secteur ou à un sujet particulier. La loi française sur le devoir de vigilance de 201766
représente, à ce jour, le seul exemple législatif consacrant un devoir de diligence
raisonnable général en matière de droits de l’homme et d’environnement. Cette loi étant
relativement récente, elle n'a pas encore fait l'objet de jurisprudence de nature à
apporter des précisions sur son interprétation et sur sa mise en oeuvre, néanmoins les
premières actions en justice ont été engagées.67 La loi britannique sur l’esclavage
moderne de 201568 impose des obligations de transparence en matière d’esclavage
moderne et de traite des êtres humains et la loi néerlandaise sur le devoir de diligence
en matière de travail des enfants de 2019 impose des obligations de diligence
raisonnable en matière de travail des enfants.69 Des propositions de lois et des
campagnes relatives à l'introduction de législations relatives au devoir de vigilance en
matière de droits de l'homme et d'environnement sont actuellement en discussion au
sein de 13 pays européens, dont 11 Etats-membres. D’autres législations nationales
contiennent certaines exigences en matière de diligence raisonnable à l'instar des lois en
matière de lutte contre la corruption, de sécurité des produits, de marchés publics, de
lutte contre le blanchiment d’argent et de devoirs des administrateurs. Certaines
obligations de diligence raisonnable dans la chaîne d'approvisionnement sont limitées à
des secteurs spécifiques, tels que le secteur du bois, des minerais ou la sécurité
alimentaire. Des obligations de diligences raisonnables sont également envisagées dans
le Projet de Traité révisé de l’ONU sur les entreprises et les droits de l’homme.70
En l'absence de devoir de diligence raisonnable général en matière de droits de l’homme
et d’environnement dans la plupart des pays européens, la jurisprudence des Etats
membres a développé diverses pistes permettant de poursuivre des entreprises en
justice pour leurs impacts négatifs sur les droits de l'homme ou sur l'environnement,
notamment sur le plan de la responsabilité civile délictuelle, sur le plan pénal ou en
termes de protection des consommateurs. Certaines actions en justice ont également été
intentées à l’encontre d’entreprises en raison de leurs contributions au changement
climatique.
61 Règlement (UE) No 995/2010 du Parlement européen et du conseil 20 octobre 2010 établissant les obligations des
opérateurs qui mettent du bois et des produits dérivés sur le marché. 62 Règlement (UE) 2017/821 du Parlement européen et du Conseil du 17 mai 2017 fixant les obligations liées au devoir de diligence à l'égard de la chaîne d'approvisionnement pour les importateurs de l'Union qui importent de l'étain, du tantale et du
tungstène, leurs minerais et de l'or provenant de zones de conflit ou à haut risque 63 Directive 2014/95/UE du Paiement européen et du Conseil du 22 octobre 2014, modifiant la directive 2013/34/UE en ce qui
concerne la publication d'informations non financières et d'informations relatives à la diversité par certaines grandes
entreprises et certains groupes. 64 Commission Européenne, Lignes directrices sur l'information non financière (méthodologie pour la communication
d'informations non financières) (2017/C 215/01). 65 Commission Européenne, Lignes directrices sur l'information non financière: Supplément relatif aux informations en rapport
avec le climat (2019/C 209/01). 66 Loi no. 2017-399 du 27 Mars 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre 67 Voir notamment Environment News Service (ENS) «Total Sued Under France's New Duty of Vigilance Law », 23 Octobre
2019, consultable à l'adresse suivante: http://ens-newswire.com/2019/10/23/total-sued-under-frances-new-duty-of-vigilance-
law/ 68 UK Modern Slavery Act 2015, s 54. Voir l'étude règlementaire et le rapport de Pays concernant le Royaume-Uni. 69 Kamerstukken I, 2016/17, 34 506, A. Voir l'étude règlementaire et le rapport de Pays concernant les Pays-Bas. 70 OEIGWG, « Legally Binding Instrument to Regulate, in International Human Rights Law, the Activities of Transnational
Corporations and Other Business Enterprises», 16 Juillet 2019.
30
Un certain nombre de développements très récents (en grande partie survenus au cours
de la réalisation de cette étude) sont venus préciser la teneur des obligations de
diligence raisonnable des entreprises concernant leurs impacts sur le changement
climatique. En particulier, en avril 2019 le Point de contact national des Pays-Bas a
éclairci pour la première fois les moyens concrets par le biais desquels les entreprises
peuvent inclure dans leur mesures de diligence raisonnable leurs objectifs en termes de
lutte contre le changement climatique, même en l’absence de mesures et de normes
internationales contraignantes sur le sujet.71 A cet effet, la décision du PCN fait référence
à l’Accord de Paris sur le climat.72
4. Analyse des problèmes et Options réglementaires (Tâche 3)
Cette partie de l'étude a consisté en une analyse des problèmes, une logique
d’intervention et l'identification des éventuelles options d’interventions réglementaires
suivantes au niveau européen:73
Option 1: Aucun changement règlementaire (scénario de référence)
Cette option n’entraînerait aucune modification de la réglementation au niveau de L’UE
en matière de devoir de diligence des entreprises tout au long de leurs chaînes
d'approvisionnement. Il est cependant escompté que les développements législatifs au
niveau national aboutiront à l'adoption de réglementations introduisant un devoir de
diligence raisonnable dans un certain nombre d'Etats membres.
Option 2: Nouvelles lignes directrices/orientations volontaires
Cette option impliquerait de nouvelles lignes directrices volontaires au niveau européen
en matière de devoir de diligence des entreprises dans leurs chaînes
d'approvisionnement. Par définition, les lignes directrices volontaires ne sont pas
juridiquement contraignantes mais pourraient avoir une influence sur les normes de
conduites attendues des entreprises.
Option 3: Nouvelle réglementation imposant de obligations en matière de
transparence (reporting)
Cette option entraînerait l'adoption d'une nouvelle réglementation au niveau européen
qui imposerait aux entreprises des obligations de rendre compte des mesures qu'elles
implémentent afin d'identifier, de prévenir et d'atténuer les incidences négatives
effectives ou potentielles sur les droits de l'homme et sur l'environnement par le biais de
leurs propres opérations et de leurs relations commerciales (y compris au sein de leurs
chaînes d'approvisionnement ou de leurs chaînes de valeur).74 Cette option pourrait se
différencier des exigences découlant de la directive concernant la publication
d'informations non financières en ce qui concerne le niveau de détail et de transparence
requis, ainsi qu'une approche centrée sur les risques pour les détenteurs de droits et la
planète, plutôt que sur les risques pour les actionnaires.
71 Voir la déclaration finale du point de contact national des Pays-Bas, consultable à l'adresse suivante:
https://www.oecdguidelines.nl/documents/publication/2019/04/19/ncp-final-statement-4-ngos-vs-ing. 72 Voir l’Accord de Paris sur le climat, consultable à l'adresse suivante: https://unfccc.int/fr/process-and-meetings/the-paris-
agreement/l-accord-de-paris. 73 D’autres considérations identifiées comme pertinentes dans le cadre la mise en œuvre d’une nouvelle intervention
réglementaire sont abordée dans le rapport complet et comprennent l'éventuelle adoption de lignes directrices non
contraignantes venant préciser le devoir de diligence, la réglementation des activités transnationales des entreprises, l’application aux groupes d’entreprise et la chaîne d'approvisionnement, la mise en œuvre au niveau des États membres, la
portée matérielle relative à la définition des droits de l’homme et des impacts environnementaux, les aspects de conflit de lois,
et la période de transition. 74 Cela dépendra de la portée de l'intervention réglementaire. Le titre de l'étude et les termes de référence se réfèrent à la
notion de chaîne d'approvisionnement, mais la portée du mandat qui est décrit envisage une application du devoir de diligence
qui s'étende à l'ensemble de la chaîne de valeur. Des définitions ont été fournies aux répondants au sondage lorsqu'ils ont été
interrogés relativement à leurs « chaînes d'approvisionnement an amount » et à leurs « chaînes de valeur en aval».
31
Option 4: Nouvelle réglementation introduisant un devoir de diligence
Cette option impliquerait l'introduction, au niveau européen, d'un devoir de diligence qui
imposerait aux entreprises de mettre en place des mesures de diligence raisonnable
propres à identifier, prévenir, atténuer et rendre compte des impacts négatifs, potentiels
ou effectifs, sur les droits de l’homme et l'environnement résultant de leurs propres
activités et de leurs chaînes d'approvisionnement ou de leurs chaînes de valeur.75 Une
entreprise pourrait démontrer, en tant que défense, qu’elle a respecté cette norme en
mettant en oeuvre le niveau requis de diligence raisonnable en tenant compte des
circonstances particulières. Il s'agirait d'une approche basée sur les risques et le
contexte particulier au sein duquel l'entreprise opère. L'exercice de la diligence
raisonnable permettrait l'établissement d'un ordre de priorité de ces risques, en fonction
de leur «gravité »76 de leur caractère « significatif »77 ou des sujets les plus
« saillants ».78
Sous-catégorie 4.1 : Nouvelle réglementation relative à une catégorie étroite
d’activités (limitées par secteur)
Dans le cadre de cette sous-catégorie, le devoir de diligence serait limité à certains secteurs
particuliers, à certaines marchandises particulières ou à certains risques particuliers (travail
des enfants).
Sous-catégorie 4.2 : Nouvelle réglementation applicable horizontalement à tous
les secteurs
Cette sous-catégorie prévoit que le devoir de diligence mentionné ci-dessus (Option 4)
s'appliquerait à tous les secteurs, soit (a) à un ensemble défini de grandes entreprises;
(b) soit à l'ensemble des entreprises quelle que soit leur taille et y compris les PME ; soit
(c) qu'il pourrait y avoir une obligation générale pour toutes les entreprises à laquelle
viendrait s'ajouter une obligation supplémentaire uniquement pour les grandes
entreprises.
Sous-catégorie 4.2(a) : application limitée à un ensemble défini de larges
entreprises
Cette sous-catégorie entraînerait un devoir général de diligence (Option 4) applicable à un
ensemble défini de grandes entreprises.
Sous-catégorie 4.2(b) : application à toutes les entreprises, y compris les PME
Cette sous-catégorie entraînerait un devoir général de diligence (option 4) applicable à
l'ensemble des entreprises, y compris les PME.
Option subsidiaire 4.2(c) : devoir général pour toutes les entreprises plus des
obligations supplémentaires spécifiques aux grandes entreprises
Cette sous-catégorie impliquerait l'adoption d'un devoir général de diligence raisonnable
pour l'ensemble des entreprises, y compris les PME, auquel viendrait s'ajouter une
obligation spécifique aux grandes entreprises. Cela pourrait par exemple consister en un
devoir général s'appliquant à l'ensemble des entreprises, auquel viendrait s'ajouter une
75 Ibid. 76 Principe directeur N° 17(b). 77 Lignes directrices de l’OCDE sur les entreprises multinationales, chapitre II, Commentaire, paragraphe 16. 78 Shift and Mazars, Cadre de reporting conforme aux principes directeurs des Nations-Unies, avec guide de mise en œuvre,
consultable à l'adresse suivante : https://www.ungpreporting.org/wp-
content/uploads/2017/05/UNGPReportingFramework_wguidance-FR.pdf, p. 22.
32
obligation supplémentaire uniquement pour les grandes entreprises en termes d'objectifs
de lutte contre le changement climatique alignés sur les objectifs de l’Accord de Paris sur
le climat.
Sous-catégorie 4.3 : Les sous-catégories 4.1 et 4.2 accompagnées par un
mécanisme de supervision et/ou un mécanisme d’exécution.
Afin de garantir sa mise en œuvre effective, la nouvelle réglementation introduisant un
devoir de diligence raisonnable (Option 4) devrait être accompagnée d’un mécanisme de
surveillance et/ou d'un mécanisme d'exécution. Cette sous-catégorie est divisée en deux
sous-catégories concernant le régime de supervision et de sanctions en cas de non-
respect, à savoir (a) par le biais de recours judiciaires et non judiciaires, ou (b) par le
biais d'un organisme de supervision étatique apte à imposer des sanctions en cas de
non-respect. Ces deux sous-catégories ne s’excluent pas mutuellement et pourraient
toutes les deux être applicables au sein du même instrument.
Sous-catégorie 4.3(a) : mécanismes pour les recours judiciaires et non
judiciaires
Cette sous-catégorie consisterait en l'introduction du devoir de diligence mentionné ci-
dessus (option 4) accompagnée de mécanismes de recours judiciaires et non judiciaires
pour les personnes affectées par l'échec de mise en oeuvre du devoir de diligence.
Sous-catégorie 4.3(b) : organisme de supervision public et régime de sanctions
en cas de non-conformité
Cette sous-catégorie consiste à introduire un devoir de diligence mentionné ci-dessus
(Option 4) accompagné d’un organisme de supervision public pouvant imposer des
sanctions en cas de non-respect. Les autorités de supervision et d’exécution (souvent
appelés organismes administratifs) pourraient être mis en place au niveau de l’UE et/ou
des États membres, au sein des services publics existants, ou dans le cadre
d’organismes nouveaux. Le régime de sanctions dont ils disposent pourrait inclure des
amendes, la désignation de systèmes de surveillance, le retrait de licences ou de
concessions commerciales ou même la dissolution de la société. Cependant, il convient
de noter qu'aucun de ces mécanismes ne comprend de recours pour les victimes, ce qui
constitue une limitation, même s'il n'est pas exclu qu'une telle option de recours puisse
être expressément prévue en plus du mécanisme de supervision public.
5. Analyse des options
L'analyse économique des options réglementaires a été entreprise par LSE Consulting
sur la base d’un examen de la littérature et d’une évaluation des résultats de l’enquête.
Elle associe des approches quantitatives et qualitatives et vise à présenter et à évaluer,
de manière préliminaire,79 les coûts et les avantages possibles des différentes options
réglementaires dans les domaines suivants: impacts économiques, impacts sociaux,
impacts environnementaux, impacts sur les droits de l’homme, et impacts pour les
autorités publiques au sein de l’UE.80 Il est important de souligner que les différentes
parties prenantes ont été exposées à des expériences différentes de lois en matière de
diligence raisonnable, de reporting et d'exigences administratives. L’absence d’exemples
79 L'analyse d'impact dont il s'agit ici est une analyse préliminaire des options réglementaires, et non pas une étude d’impact exhaustive accompagnant une proposition de réglementation. En tant que telle, l'analyse d'impact doit être considérée comme
une discussion générale des impacts potentiels qui pourraient survenir dans l'hypothèse et au moment où une nouvelle
régulation serait élaborée. 80 Compte tenu du caractère récent des lois introduisant un devoir de diligence, il s'est avéré difficile de trouver des analyses
d’impacts des lois en questions, et celles qui ont été trouvées, ne contenaient pas nécessairement des informations et/ou des
données pouvant servir à notre analyse.
33
de législations similaires sur le plan comparé a entraîné des attentes diverses parmi les
répondants à l’enquête.
La quantification des impacts économiques pour les entreprises repose sur des
estimations de jours-personnes qui ont été fournies par les répondants à l’enquête parmi
les entreprises pour chacune des quatre options règlementaires. De manière générale,
les estimations des entreprises indiquent que le nombre de jours-personnes nécessaires
et les coûts afférents, augmenteraient modérément en cas de changement réglementaire allant du « statu quo » à de « nouvelles obligations en matière de transparence
(reporting) » et augmenteraient sensiblement en cas de changement allant du « statu
quo » à « l'introduction d'un devoir de diligence ». Nous estimons que l'impact total sur
les coûts annuels supplémentaires propres aux entreprises des 28 Etats membres de l'UE
(frais de main-d’œuvre, frais généraux, et coûts des activités externalisées) serait
proportionnellement plus élevé en ce qui concerne l'Option 4, avec des variations à
prévoir en fonction de la taille et du secteur de l'entreprise, ainsi qu'en fonction du
champ d'application de l'option réglementaire.
L’impact pour la concurrence et l’innovation est difficile à évaluer ex-ante. De manière
générale, aucune distorsion significative de la concurrence intra-UE n’est attendue si
toutes les entreprises opérant au sein l’UE sont soumises au même ensemble de
réglementations. S'il est possique que les entreprises européennes subissent un
désavantage concurrentiel relatif par rapport aux entreprises non-européennes, les coûts
supplémentaires considérés en tant que pourcentage des revenus seront relativement
faibles comparativement, par exemple, au tarif standard appliqué aux marchandises
importées dans l'UE. Par conséquent, aucune distorsion significative pour les
exportateurs de l'UE résultant d'une augmentation des coûts administratifs récurrents
n'est escomptée. Les répondants à l’enquête destinée aux entreprises estiment qu'ils
bénéficieraient d’avantages significatifs, voire même très significatifs, grâce à la
réduction des distorsions, si la nouvelle réglementation européenne créait des normes
plus égalitaires pour les fournisseurs européens et non-européens.
Par ailleurs, les parties prenantes ont indiqué rencontrer un certain nombre de difficultés
en raison du manque de réglementation actuel caractérisant le statu quo, et qu'ils
escompteraient une amélioration si un devoir général de diligence était introduit au
niveau européen. Les avantages qui résulteraient d'une telle option réglementaire
incluent en particulier une amélioration de la compétitivité au travers du nivellement des
règles du jeu, qui impliquerait que les concurrents, les pairs, les fournisseurs et les tiers
seraient soumis aux mêmes standards, ainsi qu'une augmentation du pouvoir d'influence
des entreprises sur leurs relations commerciales au sein de leurs chaînes de valeur par le
biais de l'introduction de normes non-négociables. Ces avantages, qui sont difficiles à
quantifier à ce stade, doivent néanmoins être gardés à l'esprit en ce qu'ils pourraient se
révéler significatifs et ont été évoqués par les parties prenantes issues des entreprises
parmi les raisons les plus importantes au soutien de l'introduction d'un devoir de
diligence des entreprises.
De manière similaire, les répondants à l’enquête destinée aux entreprises ont fait valoir
que les risques réputationnels figuraient parmi les incitations principales à la mise en
oeuvre de mesures de diligence raisonnable dans le cadre du statu quo actuel. Il est
escompté que l'introduction d'un devoir de diligence réduirait les risques réputationnels
et qu'il s'agirait d'un des avantages les plus significatifs.
L'étude note que la numérisation et les outils des nouvelles technologies ont le potentiel
de fournir des solutions sans précédent permettant d’identifier, de remédier et d’éliminer
les violations des droits de l’homme et de l’environnement. Cependant, ces avancées
technologiques n’ont pas été prises en considération par la vaste majorité des
répondants.
34
Les impacts liés aux coûts pour les autorités publiques des Options 2 et 3 devraient
rester limités. Les coûts supplémentaires pour la supervision de la mise en œuvre de la
réglementation au titre de l’Option 4 seraient plus significatifs, en particulier dans
l'hypothèse où un mécanisme public d'exécution était mis en place par les Etats
membres ou au niveau européen (sous-catégorie 4.3). En comparaison, les recours
judiciaires prévus à la sous-catégorie 4.3(a) pourraient entraîner des coûts largement
inférieurs pour les États membres puisque ces coûts seraient inclus dans les budgets
existants pour les tribunaux et le système judiciaire.
Les Options 2 et 3 ne devraient avoir qu'un impact social positif mineur. Dans la mesure
où ces options se bornent à fournit de nouvelles lignes directrices ou à imposer des
obligations en matière de transparence (reporting), sans toutefois imposer aux
entreprises de mettre en oeuvre de manière substantielle des mesures de diligence
raisonnable, il n'est pas escompté que les entreprises mettent en place des mesures
supplémentaires substantielles afin d'aborder les enjeux sociaux. Il n'est pas non plus
attendu que l'une ou l'autre des options ait d'impacts majeurs, positifs ou négatifs, sur
les niveaux d'emploi. Il est escompté que les impacts sociaux de l’Option 4 seraient les
plus significatifs puisque l'option réglementaire en question imposerait des obligations de
mise en oeuvre de pratiques de diligence raisonnable. Toutefois, l'ampleur et le type des
impacts sociaux dépendra de la conception de la nouvelle régulation et de sa mise en
oeuvre, des enjeux sociaux dont la régulation traite, ainsi que de l'efficacité des
mécanismes de mise en oeuvre. De manière similaire, les impacts sur les droits de
l’homme et l’environnement de l’Option 4 sont considérés comme étant les plus
significatifs, bien que l'ampleur exacte de ces impacts positifs dépendent de la
supervision et de l'exécution de la règlementation. Si l’on compare les Options 2 et 3, les
répondants considèrent que les lignes directrices volontaires seraient plus efficaces que
des exigences de reporting en termes d'impacts positifs. Les impacts positifs attendus
sont conformes aux analyses d'impacts antérieures de l’UE.
35
I. INTRODUCTION
1. Introduction
This is the final report delivered for the European Commission for
JUST/2018/COMM/FW/RIGH/0070 (2018/03) on a study on due diligence through the
supply chain. For this study, the British Institute of International and Comparative Law
(BIICL) leads a research consortium in partnership with Civic Consulting and LSE
Consulting.
This report is based on the methodology set out in the Technical Annex to the request
for service under Framework contract n° JUST/2015/PR/01/0003 (“the offer”), which
corresponded to the request for services or terms of reference (hereafter “TOR”).
The report is structured around the following main parts:81
Introduction
Market practices (Task 1)
Regulatory review (Task 2)
Problem analysis and regulatory options (Task 3)
Assessment of regulatory options (Task 4)
2. Background
Action 10 of the European Commission Action Plan on Financing Sustainable Growth of 8
March 2018 provides a mandate to:82
[C]arry out analytical and consultative work with relevant stakeholders to assess:
(i) the possible need to require corporate boards to develop and disclose a
sustainability strategy, including appropriate due diligence throughout the supply
chain, and measurable sustainability targets; and (ii) the possible need to clarify
the rules according to which directors are expected to act in the company's long-
term interest. [Our emphasis].
In its May 2018 Report on Sustainable Finance, the European Parliament “[c]alls on the
Commission” to provide a “legislative proposal…” for:83
[A]n overarching, mandatory due diligence framework including a duty of care to
be fully phased-in within a transitional period and taking into account the
proportionality principle. [Our emphasis]
The European Parliament report further:84
[C]alls also for a proportionate mandatory due diligence framework based on the
2017 OECD Guidelines for Responsible Business Conduct for Institutional
Investors, requiring investors to identify, prevent, mitigate and account for ESG
factors after a transitional period; upholds that this pan-European framework
should be based on the French Corporate Duty of Vigilance Law for companies
and investors, including banks...
81 Technical Annex to the request for service under Framework contract n° JUST/2015/PR/01/0003 (“TOR”) at 17. 82 Action 10 of the Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions Action Plan:
Financing Sustainable Growth, COM/2018/097 final, 8 March 2018, available at:
https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en. 83 European Parliament Report on Sustainable Finance, (2018/2007(INI)), 4 May 2018, available at:
http://www.europarl.europa.eu/doceo/document/A-8-2018-0164_EN.html at para 6. 84 Ibid at para 11.
36
These two documents – hereafter referred to as “the Action plan” and “the European
Parliament report” respectively - and in particular the above-mentioned references to
mandatory due diligence,85 form the background for the mandate for this study.
As stated in the European Parliament report, and elaborated on in the TOR, the concept
of due diligence relevant to this study is due diligence to “identify, prevent, mitigate and
account for” adverse corporate impacts, which is the language introduced by the UN
Guiding Principles on Business and Human Rights (“UNGPs”),86 and incorporated into the
OECD Guidelines for Multinational Enterprises (“OECD Guidelines”)87 to extend to other
areas of responsible business conduct such as the environment and climate change,
conflict, labour rights, bribery and corruption, disclosure and consumer interests,88 as
well as into the ILO Tripartite declaration of principles concerning multinational
enterprises and social policy (“MNE Declaration”).89 It is also the foundation for the
French Duty of Vigilance Law, which requires due diligence (vigilance) for human rights
and environmental harms,90 and which the European Parliament report states should be
the basis for the “pan-European framework”.91
In describing the context for this study, the TOR further elaborates on the background to
this study as follows:92
[D]espite recent developments in many EU companies, many argue that
regulatory changes are necessary to foster and underpin the transition to more
sustainable business models.
A number of recent international developments point to the need for the legislator
to establish a legal framework requiring business entities to exercise human
rights due diligence in order to identify, prevent and mitigate the risks of
violations of relevant rights. However, the objective of respecting people when it
comes to the boundaries of economic value creation and business activities are
only one side of the sustainability agenda. Other so-called planetary boundaries
include the environment and climate change.
At the EU level sectorial mandatory human rights [and environmental] due
diligence obligations had been established for certain economic operators, like
85 Both the Action Plan and the Initiative Report contain multiple other actions which are relevant to sustainability. These are
related, and may be referred to on occasion in this report, but are not the focus of this study in terms of the technical details
set out in the TOR. 86 UN Office of the High Commissioner for Human Rights (“OHCHR”) “Guiding Principles on Business and Human Rights:
Implementing the ‘Protect, Respect and Remedy’ Framework”, HR/PUB/11/04, 2011 (“UNGPs”), available at:
https://www.ohchr.org/documents/publications/GuidingprinciplesBusinesshr_eN.pdf. 87 OECD Guidelines for Multinational Enterprises 2011, available at: https://www.oecd.org/corporate/mne/. See also the OECD
“OECD Guidelines for Multinational Enterprises: Responsible Business Conduct Matters” (“OECD RBC Guidance”), available at: http://mneguidelines.oecd.org/MNEguidelines_RBCmatters.pdf; and the 2017 OECD Guidelines for Responsible Business
Conduct for Institutional Investors, available at: https://mneguidelines.oecd.org/RBC-for-Institutional-Investors.pdf and
mentioned in para 11 of the European Parliament report above n 84. 88 OECD Guidelines ibid Commentary on General Policies at para 14. 89 ILO, Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, adopted by the Governing
Body of the International Labour Office at its 204th Session (Geneva, November 1977) and amended at is 279th (November 2000), 295th (March 2006) and 329th (March 2017) Sessions (“ILO MNE Declaration”). 90 Sherpa, “Vigilance Plans Reference Guidance", 1st ed., 2018, available at: https://www.asso-sherpa.org/wp-
content/uploads/2019/02/Sherpa_VPRG_EN_WEB-VF-compressed.pdf at 11. 91 The TOR at 3 provides that “[t]his exercise [i.e. this study] is meant to provide the Commission with elements for this
assessment.” 92 The TOR continues to elaborate in more detail on the developments in due diligence which are relevant to this study, starting
with the UNGPs, and followed by: recent interpretations by UN bodies relating to the human rights treaty obligations of states
to “adopt a legal framework requiring business entities to exercise human rights due diligence in order to identify, prevent and
mitigate the risks of violations of relevant rights” (TOR at 5 and fn 6); the Council of Europe Recommendation on Business and Human Rights (Rec (2016)3; TOR at 6); the OECD Guidelines for Institutional Investors above n 87; TOR at 6); and
extraterritoriality in international human rights treaties (TOR at 6). The TOR thereafter discusses in more detail: “Calls for a
mandatory Human Rights due diligence in Europe” (TOR at 6); EU competence on human rights (TOR at 7-8.); due diligence
obligations in EU (sectoral) policy instruments (TOR at 8); and National laws on due diligence in Europe (TOR at 8-9). Some of
the legal proposals discussed under this heading have since been adopted into law or developed further, and are discussed in
the Regulatory Review section.
37
importers of conflict minerals [and timber products] for example, whereas the
Non-Financial Reporting Directive introduced the concept of due diligence for a
wider range of issues but it does not establish a mandatory duty for carrying out
such procedures. While transparency requirements can be a way to incentivise
companies not to do harm, embedding sustainability matters into corporate
directors’ duty of care through the establishment of due diligence procedures is
considered by many to be more effective way to enhance responsible corporate
behaviour.
These developments form the context of this study, and are discussed in further detail in
the various sections of this report.
3. Scope and definitions
3.1 Scope
The aim of the study is:93
to provide a detailed examination of the existing regulation and proposals for due
diligence in companies’ own operations and through the supply chain for adverse
human rights and environmental impacts, including relating to climate change;
to develop and assess regulatory options94 for introducing due diligence
requirements as a legal duty of care, including the initial perceptions of
stakeholders relating to possible regulatory options.
For this purpose, and in accordance with the TOR, this report:
analyses how companies define and implement due diligence processes to
prevent, mitigate and account for adverse human rights and environmental
impacts, including with respect to climate change;95
focuses this analysis on processes and mechanisms to prevent abuses resulting
from companies’ own operations as well as in their supply and value chains.96
maps and assesses existing and planned regulation or relevant industry codes,
including relating to relevant perceptions relating to their use and impacts, as
well as present and analyse evidence regarding “which measures are most
efficient to ensure that companies effectively prevent such abuses and damage
including in their supply chain and are held accountable in case such abuses or
damage occur”.97
In accordance with the Better Regulation guidelines and toolbox: identifies the
problems and their drivers; specifies under what intervention logic an EU initiative
might possibly be launched to address these problems; identify the legal basis for
the EU initiative; identifies possible options for introducing at EU level
93 TOR at 9. 94 The study is aimed at identifying possible options for intervention at EU level. Indirectly, the scope of the study is global,
insofar as the relevant stakeholders (multinational companies and rights-holders) may be operating in or affected by both EU
and non-EU jurisdictions, through their own operations and supply chains. 95 Specified in the TOR as “including the rights of the child and fundamental freedoms, serious bodily injury or health risks,
environmental damage, including with respect to climate”. The TOR further specifies at 9 that: “As regards the rights of the child and to child labour in the supply chains, the analysis should particularly focus on agriculture, including the coffee, tea and
cocoa sectors.” 96 Described in the TOR as resulting “directly or indirectly from the operations of the company and of the companies it controls,
as well as from the operations of the subcontractors or suppliers with whom it maintains a regular or an established
commercial relationship”. TOR at 9-10. 97 TOR at 10.
38
requirements for companies to develop such processes; and assess the impacts of
these options.98
It is noted that this this is an initial study for the development of regulatory options.
As such, it is not a public consultation on a regulatory proposal, and it is not a full-scale
impact assessment which would accompany any such regulatory proposal.99
It is also noted that this study is not a review of the level of implementation of, or a
fitness check of any existing regulatory measures, including the EU Non-Financial
Reporting Directive, or of the uptake or implementation of the UNGPs. It is furthermore
not itself a due diligence or impact assessment of corporate practices. The background to
and mandate for this study is set out in detail above.
3.2 Definitions
The definitions for the purposes of this study are as follows. Where relevant, definitions
were described to survey participants as part of the survey.
Based on this framework as set out in the TOR,100 we will use the following definitions:
“Companies” will be used to refer to all business enterprises, regardless of their
legal format or structure of incorporation.
“Due diligence” will be used in accordance with the definition used in the EU
Parliament Report,101 which is based on the description of due diligence
introduced by the UNGPs (defined above). The UNGPs was a result of extensive
stakeholder consultation by the Special Representative on Business and Human
Rights, John Ruggie,102 and was adopted unanimously by the UN Human Rights
Council in 2011. While it is not a legally binding instrument, it is widely influential
and constitutes the first authoritative global standard on business and human
rights. This concept of due diligence has been introduced in various international
instruments and standards, including the ILO's Tripartite declaration of principles
concerning multinational enterprises and social policy (MNE Declaration) revised
in 2017, the ISO's 26000 Social Responsibility Guidance Standard, and the UN
Global Compact.103 In particular, the OECD Guidelines were revised in 2011 to
align with the UNGPs and the due diligence approach was not only applied to the
human rights chapter, but also extended to other areas of responsible business
conduct such as employment and industrial relations, environment and bribery.104
Due diligence has also been referenced in a number of other EU and domestic
regulatory instruments105 including current legal developments for mandatory due
diligence discussed in the TOR and described in further detail in the regulatory
review section below.106 The stakeholder views collected through the surveys and
interviews (see section on market practices below) further confirm that the
98 TOR at 10. 99 The original timeline set for this study in the TOR was seven months. 100 TOR at 4-9. 101 Ibid. 102 John Ruggie, Just Business, Norton, NY (2013) at 141-148. 103 UN Global Compact, “Human Rights”, available at: https://www.unglobalcompact.org/what-is-gc/our-work/social/human-rights. 104 See, for example, the OECD Guidelines above n 87 and the Equator Principles, available at: https://equator-principles.com/. 105 Chiara Macchi and Claire Bright, “Hardening Soft Law: The Implementation of Human Rights Due Diligence Requirements in
Domestic Legislation”, in M. Buscemi, N. Lazzerini and L. Magi, Legal Sources in Business and Human Rights - Evolving
Dynamics in International and European Law (forthcoming, Brill, 2019). 106 TOR 8-9.
39
concept of due diligence as introduced by the UNGPs provide the relevant
framework for the discussion about due diligence for the purposes of this study.
“Due diligence through the supply chain or value chain” for the purpose of
this study, refers to due diligence processes to prevent, mitigate and account for
human rights (including labour rights and working conditions) and environmental
impacts, including relating to climate change, both in own operations and the
supply chain. The study further looks at the current practices for downstream and
value chain due diligence. “Supply chain” and “value chain”, respectively, will be
understood within the broad definition of a company’s “business relationships” as
described in the UNGPs,107 and the OECD Guidelines. The title of the study in the
TOR refers to the “supply chain”, but the scope described in the TOR envisions a
possible application of regulatory intervention to the entire value chain. Survey
respondents were asked about current practices for due diligence both upstream
and downstream in the value chain, and where relevant, detailed definitions
relating to these respective concepts were provided to survey respondents.108
“Governance” or “corporate governance” will be understood to include due
diligence as part of corporate risk management and compliance.109 Where
relevant, country reports refer to the regulatory landscape for corporate
governance areas such as anti-corruption, bribery and money-laundering,
including how due diligence is used as a legal standard of care in these regulatory
models, and how liability is applied in the context of parent companies,
subsidiaries and suppliers. Anti-corruption models for due diligence inform the
comparative analysis relating to the assessment of sub-options relating to
enforcement and sanction.
“Human rights” will be used to include all internationally and EU-recognised
human rights, in line with the Charter of Fundamental Rights of the European
Union. Human rights accordingly include, inter alia, all the rights contained in the
Universal Declaration of Human Rights, the International Covenant on Civil and
Political Rights and the International Covenant on Economic, Social and Cultural
Rights, the principles concerning fundamental rights in the eight ILO core
conventions, the Declaration on Fundamental Principles and Rights at Work, the
ILO's Tripartite declaration of principles concerning multinational enterprises and
social policy (MNE Declaration), the ILO Centenary Declaration for the Future of
Work, the UN Convention of the Rights of the Child, the European Convention on
Human Rights, the European Charter of Fundamental Rights, and rights set out in
the main global human rights treaties and under customary international law.110
For clarity, the study refers to “human rights and environmental” due diligence
unless otherwise specified.
“Sustainability impacts” will be understood within its meaning set out in the
Better Regulation Guidelines and Toolbox to include social, environmental and
107 The definition set out the Commentary to Guiding Principle 13 includes “relationships with business partners, entities in its
value chain, and any other non-State or State entity directly linked to its business operations, products or services to include
wider meaning of a company’s business relationships”. It is also noted that the Commentary to Guiding Principle 17 elaborates
on the level of due diligence required through the supply chain and value chain: “Where business enterprises have large
numbers of entities in their value chains it may be unreasonably difficult to conduct due diligence for adverse human rights
impacts across them all. If so, business enterprises should identify general areas where the risk of adverse human rights
impacts is most significant, whether due to certain suppliers’ or clients’ operating context, the particular operations, products
or services involved, or other relevant considerations, and prioritize these for human rights due diligence”
108 For further information on the questions asked in the survey, please see Part II: Survey Results Statistics. 109 See, for example, the following definition of corporate governance as set out in the Green Paper on Corporate Governance
Institutions and Remuneration Policies, COM(2010) 284 final: “The traditional definition of corporate governance refers to
relations between a company's senior management, its board of directors, its shareholders and other stakeholders, such as
employees and their representatives. It also determines the structure used to define a company's objectives, as well as the
means of achieving them and of monitoring the results obtained”. 110 TOR at 9.
40
human rights impacts. The surveys and assessment of the regulatory options are
structured around an inclusive understanding of human rights and sustainability,
and cover the following sustainability impacts, amongst others: air pollution
(emissions of greenhouse gases, of carbon dioxide (CO2), of sulphur oxides
(SOx), of nitrogen oxides (NOx), and of particulates), waste, energy use and mix,
water resources, biodiversity (including wildlife), rights of the child, right to life,
liberty and security of person (including in this context, impacts on serious bodily
injury), and right to the enjoyment of the highest attainable standard of physical
and mental health (including, in this context, health risks impacts of business).111
Stakeholders were also asked about the application of due diligence practices to
large-scale negative economic impacts, such as profit-shifting to low tax
jurisdiction.112 The Regulatory Review discusses how due diligence fits in with the
Sustainable Development Goals (“SDGs”), and more broadly with the
sustainability framework.
4 Methodology
The detailed methodology for each task (evidence of market practices, the regulatory
review and the assessment of regulatory options) is discussed in each respective section
below.
In summary:
The methodology for the collection of evidence on Market Practices (Task 1)
consisted of surveys, interviews, case studies, and desktop and legal research of
relevant materials. Interviews were undertaken by BIICL and Civic.
The methodology for the Regulatory Review (Task 2) consisted of the collection of
twelve Country Reports from legal experts with knowledge of due diligence in the
relevant jurisdiction. Country Reports are contained in the annexure Part III
Country Reports, and summarised and analysed in the Regulatory Review section.
This summary is preceded by an overview of the nature of due diligence, based
on a review of the relevant instruments, documents and literature.
The methodology for the Problem Analysis and Regulatory Options (Task 3)
consisted of an analysis of the problems and possible intervention options, based
on the empirical evidence gathered in the section on market practices, as well as
information about the regulatory framework set out in the regulatory review. The
problem analysis and regulatory options were developed by BIICL and Civic
Consulting.
The section on the Assessment of regulatory options (Task 4) assesses the
possible quantitative and qualitative impacts of the regulatory options developed.
The Assessment of regulatory options was undertaken by LSE Consulting.
5 General Overview
Since this study was commissioned, the relevant landscape has changed significantly.
The Netherlands have introduced a Child Labour Due Diligence Law.113 Finland
committed to undertake a study on a mandatory human rights due diligence law in
111 See the discussion in Karin Buhmann, Jonas Jonsson, Mette Fisker, "’Do no harm’ and ‘do more good’ too: connecting the SDGs with business and human rights and political CSR theory", Corporate Governance: The International Journal of Business
in Society (2018). 112 Companies’ tax saving behaviour is addressed through tax policy at national level and in international tax treaties, which
exceed the scope of this project. Similarly, income inequality is driven by a myriad of factors such as taxation, social insurance,
competition, and law-induced rents in various sectors of the economy, all of which exceed the scope of this analysis. 113 Kamerstukken I, 2016/17, 34 506, A. See the Netherlands Country report.
41
Finland, and explore options for such a law at EU level.114 In Italy, an open letter signed
by over 50 academics and experts was addressed to the Italian institutions on 11
November 2019, stating that "the time is ripe for Italy to start a policy process towards
the adoption of effective legislation on human rights due diligence, in line with its
international obligations and with the positive example of other European countries."115
In Germany, a draft outline for a suggested mandatory human rights and environmental
due diligence law has been discussed amongst stakeholders, although it is not a formal
draft proposal.116
Across Europe, various new campaigns have been launched for the introduction of
domestic laws requiring mandatory due diligence for human rights and environmental
impacts. During the course of this study, in May 2019, the Business and Human Rights
Resource Centre launched a portal dedicated to tracking initiatives towards mandatory
due diligence laws.117 The portal currently lists 13 countries where such initiatives have
been discussed or adopted, of which 11 are EU Member States: Austria, Belgium,
Denmark, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Sweden and
the United Kingdom. The remaining two are Norway and Switzerland, where mandatory
due diligence laws would be likely to affect many EU-based companies.118 Recent trends
have witnessed a growing support for mandatory human rights due diligence regulation
from certain large multinational corporations.119
In parallel, calls for mandatory due diligence legislation at the EU level have started to
emerge,120 including from certain major multinational corporations.121 In March 2019,
the Responsible Business Conduct Working Group (“RBC Group”) of the European
Parliament presented its Shadow EU Action Plan on the implementation of the UNGPs,
calling, amongst other things, for the adoption of mandatory due diligence for EU
businesses and business operating within the EU.122 On 3 October 2019, over 80 NGOs
and trade unions published a call on the European Commission “for effective EU
legislation that establishes a mandatory human rights and environmental due diligence
framework for business, companies and financial institutions operating, or offering
products or service, within the EU.”123 In November 2019, the European Network of
National Human Rights Institutions (ENNHRI)124 issued a statement to the new European
114 Finnwatch,”Finnish Government commits to HRDD legislation', European Coalition for Corporate Justice, 3 June 2019,
available at: http://corporatejustice.org/news/15476-finnish-government-commits-to-hrdd-legislation. 115 Open letter to the Italian institutions on the issue of Business and Human Rights, available at: https://www.business-
humanrights.org/sites/default/files/Open_letter_B%26HR_English.pdf 116 Business and Human Rights Resource Centre (“BHRRC“), “German Development Ministry drafts law on mandatory human
rights due diligence for German companies”, available at: https://www.business-humanrights.org/en/german-development-
ministry-drafts-law-on-mandatory-human-rights-due-diligence-for-german-companies. It is noted that the German Federal Government recently issued a statement stressing that the document merely constitutes "internal considerations“ within the
German Federal Ministry for Industrial Cooperation and Development ("BMZ"), https://www.bundestag.de/presse/hib/670510-
670510. 117 BHRRC, “Mandatory Due Diligence”, available at: https://www.business-humanrights.org/en/mandatory-due-diligence. 118 The 11 EU Member States listed are Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, the
Netherlands, Sweden and the United Kingdom. The two remaining listed countries are Norway and Switzerland. BHRRC
“National movements for mandatory human rights due diligence in European countries”, 22 May 2019, available at:
https://www.business-humanrights.org/en/national-movements-for-mandatory-human-rights-due-diligence-in-european-
countries. 119 For example, this is the case with the Finnish campaign calling for mandatory human rights legislation in Finland, Finnwatch above n 114, and the Swiss legislative counter-proposal which has received business support, Maude Bonvin, “Entreprises
mises devant leurs responsabilités“, Agefi, 15 June 2018, available
at: https://www.gemonline.ch/uploads/_Files/documents_publics/Revue_de_presse/2018/2018.06.15_Agefi_Entreprises%20m
ises%20devant%20leurs%20responsabilites.pdf. 120 See below the Section III Regulatory Review on EU-level standard and developments. 121 Fern, ”Chocolate companies and MEPs call for EU Due Diligence Regulation”, 10 April 2019, available at:
https://www.fern.org/news-resources/chocolate-companies-and-meps-call-for-eu-due-diligence-regulation-954/. 122 Responsible Business Conduct Working Group, Shadow EU Action Plan on the Implementation of the UN Guiding Principles
on Business and Human Rights within the EU, March 2019, available at: https://responsiblebusinessconduct.eu/wp/wp-content/uploads/2019/03/SHADOW-EU-Action-Plan-on-Business-and-Human-Rights.pdf at 6. 123 European Coalition for Corporate Justice (”ECCJ”), ”Civil Society Calls for Human Rights and Environmental Due Diligence
Legislation”, 3 October 2019, available at: http://corporatejustice.org/news/16785-civil-society-calls-for-human-rights-and-
environmental-due-diligence-legislation. 124 The European Network of National Human Rights Institutions (ENNHRI) is a network which brings together 45 National
Human Rights Institutions across wider Europe.
42
Commission which recommends125 the development adoption of an EU-level Action Plan
on Business and Human rights which should include measures on a “European Human
Rights Due Diligence legislation”.126 The ENNHRI notes:127
[T]o enhance legal certainty for both rights holders and businesses and to ensure
a level playing field within the EU, the Action Plan should aim at avoiding the
creation of an eclectic system of human rights due diligence norms that differ
from member state to member state and should instead assess options for an EU-
level regulation in this area.
Simultaneously, in the US, the Business Roundtable during August 2019 released a new
statement signed by 181 CEOs on the Purpose of a Corporation, which marks a paradigm
shift from shareholders to stakeholders focus. The statement affirms a fundamental
commitment to the benefit of all stakeholders, including customers, employees,
suppliers, communities, as well as shareholders.128 Meanwhile, in France the so-called
“Loi PACTE” of 2019 introduces a requirement for the corporate purpose to be managed
“taking into consideration the social and environmental stakes linked to its activity”.129
The December 2019 Communication on the European Green Deal highlights that
sustainability should be “further embedded into the corporate governance framework, as
many companies still focus too much on short-term financial performance compared to
their long-term development and sustainability aspects”.130
In this context of a growing trend in the direction of mandatory due diligence laws, this
study has generated extraordinary interest. We were approached by numerous
stakeholders asking to be surveyed or interviewed, and a total of 631 stakeholders
responded to the surveys. The level of interest was evident not merely from the high
numbers, but also substantively from our discussions, interviews and informational calls
and meetings with stakeholders. From the outset, all stakeholders impressed upon us
the importance of this study and of possible EU-level regulation on mandatory due
diligence.
125 ENNHRI, "Recommendations of the new EU Commission: developing and adopting an EU-level Action plan on Business and
Human Rights", November 2019, available at: http://ennhri.org/wp-content/uploads/2019/11/ENNHRI-BHR-Statement_EU-
Commision.pdf 126 Ibid at 4. 127 Ibid. 128 US Business Roundtable, ”Statement on the Purpose of a Corporation”, August 2019, available at:
https://opportunity.businessroundtable.org/wp-content/uploads/2019/08/Business-Roundtable-Statement-on-the-Purpose-of-
a-Corporation-with-Signatures.pdf. 129 LOI n° 2019-486 du 22 mai 2019 relative à la croissance et la transformation des entreprises, available at:
https://www.legifrance.gouv.fr/eli/loi/2019/5/22/2019-486/jo/texte.
130 Communication from the Commission to the European Parliament, the European Council, the Council, the European
Economic and Social Committee and the Committee of the Regions, ”The European Green Deal”, COM(2019) 640 final, 11
December 2019, at p.17.
43
Table A: Regulatory options developed in this study
Regulatory Option Description
Option 1: No policy change (baseline scenario)
No changes in regulation at EU level for companies on undertaking due diligence through the supply or value chain. Expectation that possible legal developments at Member States’ level will continue.
Option 2: New voluntary guidelines / guidance
New voluntary guidelines at EU level for companies on undertaking due diligence through
the supply or value chain. Voluntary guidelines are not usually legally enforceable, but may influence the standard expected of companies.
Option 3: New regulation requiring due diligence reporting
New regulation at EU level requiring companies to report on the steps they have taken to identify, address, prevent and mitigate any adverse human rights and environmental
impacts in their own operations or of third-party business relationships (including the supply or value chain). This may differ from the EU non-financial reporting directive with
regard to level of detail and transparency required, and an express focus on risks to people and the planet rather than materiality to shareholders.
Option 4: New regulation requiring mandatory due diligence as a legal duty of care
A new mandatory due diligence requirement at EU level would require companies to carry out due diligence to identify, prevent, mitigate and account for actual or potential human rights and environmental impacts in its own operations and supply or value chain, as a legal
duty or standard of care.
Sub-option 4.1: New regulation applying to a narrow category of business (limited by sector)
The above new mandatory due diligence regulation (Option 4), which would only apply to certain sectors.
Sub-option 4.2: New regulation applying horizontally
across sectors:
The above new mandatory due diligence regulation (Option 4) which would apply across
all sectors.
Sub-option 4.2(a): applying only to a defined set of large companies
The above new mandatory due diligence regulation (Option 4) which would only apply to larger companies.
Sub-option 4.2(b): applying to all business, including SMEs
The above new mandatory due diligence regulation (Option 4) which would apply to all companies, including SMEs.
Sub-option 4.2 (c): general duty applying to all business plus specific additional obligations only applying to large companies
The above new mandatory due diligence regulation (Option 4) consisting of a general duty applying to all business, including SMEs, plus additional obligations only applying to large companies, for example additional obligations for large companies relating to the Paris Agreement on Climate Change.
Sub-option 4.3: Sub-options 4.1 and 4.2 accompanied
by a statutory oversight and / or enforcement
mechanism:
The above new mandatory due diligence regulation (Option 4) accompanied by an
oversight and/or enforcement mechanism.
Sub-option 4.3(a): mechanisms for judicial or non-judicial remedies
The above new mandatory due diligence regulation (Option 4) accompanied by mechanisms for judicial and non-judicial remedies
Sub-option 4.3(b): state-based oversight body and sanction for non-compliance
The above new mandatory due diligence regulation (Option 4) accompanied by a State-based oversight body and sanctions for non-compliance.
44
II. MARKET PRACTICES
1. Introduction
This section examines current market practices for due diligence through the supply
chain. It sets out some of the findings of our surveys and interviews within the
discussion. Where relevant, it also sets out the relevant findings of a literature review
and legal research, including guidance, civil society reports, academic literature,
mainstream media, statutes, draft legal proposals and case law. It also contains ten
short case studies that highlight interesting examples of some due diligence-related
company practices that are discussed in publicly available materials.
The findings in this section should be read in conjunction with the discussion of the
existing laws and standards in the Regulatory Review, as well as the regulatory options
developed in the Problem Analysis and Regulatory Options.
Please note that the graphic representations of the survey findings are set out
below in the PART II Survey Results Statistics, and key statistical findings are
analysed in the Assessment of Options section.
2. Methodology
For the Market Practices section, we undertook two separate surveys, one for companies
(hereafter often referred to as “business” respondents), and one for all other
stakeholders (hereafter referred to as “general” respondents), including business
associations and industry organisations, civil society, worker representations or trade
unions, legal practitioners and government bodies.
The business survey asked specific questions about current due diligence practices,
including the costs and benefits of these activities as well as perceived impacts of
possible regulatory options on individual companies. Both surveys asked respondents for
their views on the existing regulatory framework, and about the likely impacts of the
relevant regulatory options.131 In accordance with the EU Better Regulation framework,
sustainability impacts were categorised as social, environmental and human rights
impacts.
The surveys were disseminated widely amongst stakeholders across the European Union
and worldwide during late March 2019.132 The original survey deadline was 26 April
2019, which was extended, at the request of stakeholders due to the high level of
interest in the study, to 7 May 2019.
We received a total of 631 survey responses, divided between 334 responses to our
business survey (with a 28% completion rate)133, and 297 responses to our general
stakeholders’ survey (with a 48% completion rate).
In addition to the surveys, we undertook 35 interviews with business and other
stakeholders. Of these, 10 interviews were with companies and 25 interviews with other
stakeholders, including 7 business-facing organisations, 12 civil society organisations or
NGOs, 1 trade union association, 2 government officials, 1 academic, 1 OECD National
Contact Point and 1 international organisation. Interviewees are operational across the
131 This study did not aim to ascertain whether companies or respondents are advocating for any measure above another.
Instead, respondents from a wide range of business and other stakeholders were asked detailed questions about the perceived
impacts based on their detailed experience with due diligence. 132 The survey was disseminated widely across the contacts of study partners, and relevant contacts reported of further
distribution amongst their own networks. 133 Completion rate refers to the number of respondents who completed the entire survey.
45
EU and the world, and primarily based in Belgium, Finland, France, Germany, the
Netherlands, Norway, Spain, Switzerland, Poland, the UK and the US.
Interviews took place between late March and early May 2019. Interviews were
anonymous, but where interviewees are named below, they provided permission for
these quotes to be attributed to them. In addition to these interviews, we also undertook
15 informational calls or meetings with further stakeholders and experts, including
business-facing advisors, business membership organisations, civil society and legal
practitioners. The information received during informational calls or meetings informed
our findings and, where relevant, anonymous quotes are included. For ease of reference,
both interviewees and those stakeholders with whom we undertook informational calls or
meetings will be described herein as “interviewees”.
In addition, this section analyses current market practices with reference to ten case
studies, based on publicly available information. Case studies were selected based on
informative examples of how companies are currently undertaking due diligence, how
these practices have developed, and some of the challenges which companies face.
This research was supplemented by desktop and legal research, including relevant
guidance, civil society reports, academic literature, mainstream media, statutes, draft
legal proposals and case law.
3. General survey data
Business survey respondents 3.1
Business respondents were spread relatively even across sectors,134 with the top six
most represented sectors being manufacturing (20.66%), automotive (12.28%), IT and
technology (10.48%), financial services (9.88%) consumer goods (9.58%), and
agriculture and agribusiness (8.68%).135 Business respondents represented enterprises
of all sizes. Of those business respondents which operate in agriculture or agribusiness,
38.1% operate in coffee, 38.1% in cocoa and 9.52% in tea. Over half (52.38%) selected
other agricultural subsectors, the most predominant of which included oilseed, grain,
tobacco, cotton, wheat, fruit, vegetable seeds, sugar and equipment for agriculture.
The majority (65.90%) of respondents are large multinational companies with 1000 or
more employees, but SMEs were also represented: 9.58% respondents have 50 to 249
employees, and 7.66% have 0 to 9 employees. Following this, 7.28% of respondents
have 500 to 1000 employees, 6.51% have 250 to 500 employees, and 3.07% have 10
to 49 employees. Business respondents estimated that they had, in total, over 3
million136 first tier suppliers, and over 1 billion suppliers in the upstream supply chain.137
For simplicity, SMEs for the purpose of this study will be defined with reference to the
number of employees specified by survey respondents, in accordance with the following
thresholds contained in the EU definition of SMEs in EU recommendation 2003/261:138
134 These sector categories were agreed in terms of the inception report as part of the business and general survey
questionnaires. 135 Of those business survey respondents who selected agriculture and agribusiness, 36.36% operate in coffee and 36.36%
operate in cocoa, with 9.09% operating in tea, and the remaining 54.55% operating in other areas of agriculture. 136 Total estimated number of all respondents’ first tier suppliers: 3,293,716. 137 Total estimated number of suppliers in all respondents’ entire upstream supply chains: 1,059,375,426. Total estimated
number of business enterprises in all respondents’ entire value chain (including upstream and downstream) : 1,066,565,386. 138 EU Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises
(Text with EEA relevance) (notified under document number C(2003) 1422), available at: https://eur-
lex.europa.eu/eli/reco/2003/361/oj. It is noted that our references to SMEs in this section relates to employee numbers rather
than turnover, and that the accuracy of the information regarding number of employees provided by the individual survey
respondents was not verified.
46
Micro: 10 or less employees
Small: 50 or less employees
Medium-sized: 250 or less employees
Where relevant below, and particularly relating to current due diligence practices and
views on regulatory options, business survey responses are presented with reference to
the company size by number of employees. It should be noted that the samples of
micro, small and medium company respondents are significantly smaller than those of
respondents with 1000+ employees. Where breakdowns by company size are not
provided, it should be assumed that these findings either follow the general overall
trends, that breakdowns by company size are not significantly revealing or relevant, or
that sample sizes are too small. Analysis by company size are discussed in further detail
in the Assessment of Options section.
Business respondents operate across the EU and the world, with 2.86% of business
respondents indicating that they only operate outside of the EU, and 15.32% of
respondents indicating that they only operate within the EU.139 Business respondents
operate in all Member States, insofar as each Member State was selected by at least 40
business respondents.
The primary base or headquarters of business respondents were spread across EU
Member states, with the majority being based in Germany (39.09%), followed by France
(10.75%), Sweden (8.79%), the Netherlands (6.51%), the UK (5.54%),140 Spain
(4.56%), Finland (4.23%) and Italy (4.23%). Of business respondents, 13.36% are
primarily based outside of the EU, of which most are in Switzerland, followed by the
USA, and thereafter Japan and Australia. No business respondents selected Bulgaria,
Cyprus, Hungary or Romania as their primary base.
The majority of business respondents were from the corporate social responsibility
(29.24%) or sustainability (22.22%) functions within their companies, followed by legal
(9.36%) and procurement or supply chains (8.19%). 7.02% were Directors. Within
micro survey respondents with 9 or less employees, 50% of respondents were CEOs.
Business respondents with 1000 employees or more were predominantly multinational:
of the 38 respondents 1000+ employee respondents which indicated that they operate
only within the EU, only three operate exclusively in one member country (i.e. are very
large national companies rather than a multinational). Only 2.86% of 1000+ employee
respondents indicated that they only operate outside of the EU, and of these all are
multinational, with many operating in large or multiple regions which are different from
where they are headquartered. For the purposes of the analysis in this section, we
accordingly refer to large or 1000+ employee companies as multinationals, particularly
where the publicly expressed views of multinationals are under consideration.
General survey respondents 3.2
About half (50.17%) of general respondents were from civil society, followed by industry
organisations (21.89%). Other groups were significantly smaller: public authorities or
government departments were 5.39%, legal practice corporate advisors were 4.38%,
trade unions or worker representation were 4.38%, and legal practice claimant advisers
were 4.04%.Three respondents were from OECD National Contact Points, two from
national human rights institutions, one from a labour inspectorate, and one from an
environmental inspectorate.
139 Of micro respondents with 9 or less employees, 47.06% indicated that they only operate within the EU. 140 In light of uncertainty around the UK’s leave from the European Union, the UK was listed in the survey as both a Member
State, in square brackets, and in the question about operating outside of the EU.
47
The views of the top two most represented general stakeholder groups, namely civil
society and industry organisation respondents, were often quite contrasting. For key
questions below, the views of these two stakeholder groups are presented by
stakeholder group, in addition to the general stakeholders’ views.
Insofar as industry organisations represent significant numbers of business members of
all sectors, sizes and operating contexts, and were the second largest stakeholder group
amongst general stakeholder respondents, their views are discussed in this survey as
representative of a broad base of business. Indeed, although the survey was
anonymous, industry organisations frequently identified themselves in their responses
(many of which were detailed and considered). From this identification it is evident that
industry organisations represented a comprehensive and persuasive range of business
views. For example, one industry organisation respondent alone represents 8000
companies with €7.6 trillion market capital, and another has over 16 000 member
companies.
The views of industry organisations are in key places compared and contrasted with the
views of civil society stakeholders. Moreover, in some instances the views of business
respondents, particularly multinational companies, are notably different from those of
industry organisations. Where this is the case for key questions, these contrasting views
will be highlighted.
The most (39.70%) general stakeholders indicated that their work is not sector-specific
or spans across sectors. Of those who do work on specific sectors, the most (35.21%)
work in agriculture and agribusiness. Of these, over two thirds (67.47%) work in cocoa,
33.73% in coffee, and 30.12% in tea. After agriculture, the most selected sectors by
general respondents were mining and quarrying (22.85%), consumer goods (22.10%),
manufacturing (19.10%) and financial services (14.61%). General survey responses
cover all of the sectors in their work: all of the sectors on our list were selected by at
least five respondents.
Half of civil society respondents indicated that their work focuses on agriculture and
agribusiness (50.74), followed by over a third which indicated that their work is not
sector-specific or cuts across sectors (36.76%). Just under a third (30.15%) of civil
society respondents work in the area of mining and quarrying, and just under a quarter
in consumer goods (23.53%). Of those working in agriculture, 65.08% work in cocoa,
36.51% in coffee and 30.16% in tea. Almost two thirds (65.08%) also work in other
agricultural subsectors, the most prominent of which were palm oil, beef, soy, sugar,
rubber, banana, cotton, and timber.
Just over a third (35.71%) of respondents from industry organisations indicated that
their work is not sector-specific or cuts across sectors, followed by manufacturing
(32.14%), consumer goods (19.4%) and agriculture and agribusiness (16.07%). Of
those who selected agriculture, four respondents work in cocoa, one in tea and one in
coffee. One works in palm oil and soy.
General stakeholders work with companies that are primarily based in all EU Member
States: all of the Member States were selected by at least 17 respondents. The most
frequently selected Member State in terms of company headquarters was Germany
(40.24%) followed by the UK (36.65%), the Netherlands (29.08%), France (26.69%)
and Belgium (23.11%). 31.47% of general respondents indicated that they work
globally, or with companies primarily based outside of the EU, particularly Switzerland
and the US. Other countries which were mentioned as being the primary base of
companies which general stakeholders work with include (alphabetically) Argentina,
Australia, Bangladesh, Brazil, Cambodia, Cameroon, Canada, China, Colombia, Côte
d'Ivoire, DRC, Guatemala, Guyana, India, Indonesia, Japan, Kenya, South Korea,
48
Lebanon, Liberia, Malawi, Malaysia, Nicaragua, New Zealand, Nigeria, Norway, Paraguay,
Peru, Singapore, South Africa, Sri Lanka, and Suriname.
Similarly, general stakeholders’ work cover countries which operate across EU Member
States and the world: all EU Member States were selected by at least 37 general
respondents. The top most selected EU Member States by general stakeholders with
respect to where the companies covered in their work are operating were Germany
(42.32%), the UK (38.17%), the Netherlands (36.51%), France (33.61%) and Italy
(29.46%).
The vast majority of general stakeholders also indicated that companies relevant to their
work operate outside of the EU. Of these, 70.54% work on companies that operate in
Asia (excluding India and China), 62.05% in Latin America (including Mexico), 57.14% in
China, 56.7% in Sub-Saharan Africa, 54.02% in India, and 47.77% in the US and
Canada. Only 16.96% of respondents indicated that companies relevant to their work
operate mainly within the EU.
General respondents’ work covers companies of all sizes, with the majority (56.50%)
indicating that their work relates to large companies with 1000 or more employees.
4. Current due diligence practices
In accordance with the TOR, our discussion of current business practices for due
diligence will take place within the framework of the four components of due diligence as
set out in the UNGPs,141 namely:
1. Identifying and assessing actual or potential adverse impacts
2. Taking integrated action to address these impacts
3. Tracking the effectiveness of those actions taken, and
4. Communicating how impacts are addressed.
The findings of the empirical evidence and analysis will be supplemented, where
relevant, by ten case studies which demonstrate real-life examples of certain practices.
Overview of current practices 4.1
Survey respondents were asked questions about whether companies are currently
undertaking due diligence for human rights and environmental impacts, and if so how
they are doing this within their own operations and supply chains. Moreover, survey
respondents were asked what language is used for these processes, and whether due
diligence covers climate change and wider social issues.
Of business respondents, 37.14% are undertaking due diligence which takes into
account all human rights and environmental impacts (but as noted below, only about
16% cover the entire value chain). This is closely followed by 33.71% which currently
undertake due diligence only in certain areas (for example health and safety, labour,
non-discrimination and equality, environmental, land rights and indigenous
communities).
Only 7.43% indicated that they are currently undertaking environmental or climate
change due diligence which does not extend to other human rights. The same number,
7.43% of respondents, indicated that they do not and have not undertaken any form of
due diligence for any human rights or environmental impacts.
141 UNGP 17.
49
These trends are similarly reflected in respondents companies with over 1000
employees, 42.98% of which conducts “[h]uman rights due diligence which takes into
account all human rights (including environment)”, and 38.84% undertake this due
diligence only in certain areas. Within these large companies, only 4.96% indicated that
they undertake environmental or climate change due diligence which does not extend to
other human rights. Within large companies, only 2.48% do not currently undertake any
form of due diligence.
Although the samples are smaller, survey results suggest that current due diligence
practices within SMEs are slightly less established. Of micro respondents with 9 or less
employees, 60% indicated that they did not know whether their company undertakes
due diligence, which is notable insofar as 50% of this size group indicated that they are
CEOs. Moreover, 20% indicated that their company does not or has not undertaken any
form of due diligence for human rights or environmental impacts. Of medium-sized
respondents with 50 to 249 employees, 33.33% undertake “human rights due diligence
which takes into account all human rights (including environment)”, and 27.78%
undertake such due diligence only in certain areas. 16.67% undertake environmental or
climate change due diligence which does not extend to other human rights, and 16.67%
indicated that their company does not currently undertake due diligence for these
impacts.
It should be noted that these are respondents’ self-reported perceptions on their
companies’ due diligence practices. These should be considered within the broader
background of the general stakeholders’ responses discussed below, as well as external
reports regarding corporate due diligence practices, which generally show lower figures
of implementation in relation to existing corporate implementation of due diligence. A
growing body of evidence exists about the current due diligence practices of companies
for their human rights and environmental impacts, which is discussed in further detail in
the Problem Analysis and Regulatory Options section.
For example, a 2016 study carried out by BIICL and the law firm Norton Rose Fulbright
revealed that the majority of companies are failing to undertake human rights due
diligence, with over half of surveyed companies142 having never had a dedicated human
rights due diligence process in place. The report highlighted that, as a result, companies
are failing to identify potential or actual adverse human rights impacts in their activities
and throughout their value and supply chains.143 It showed that those companies which
undertake non-specific due diligence (not expressed in human rights terms) in
accordance with existing regulated areas such as health and safety and labour laws were
failing to identify and address other risks outside of these areas.
Similarly, in 2018, the Corporate Human Rights Benchmark assessed 101 of the largest
publicly traded companies in the world across three industries (agricultural products,
apparel and extractives).144 The findings of the assessment depict a “deeply concerning”
picture, with the majority of companies scoring poorly on the Benchmark,145 and 40% of
companies scoring no points at all across the human rights due diligence section of the
assessment.146
142 The study surveyed 152 major companies working across various sectors. 143 The BIICL study was published as Robert McCorquodale, Lise Smit, Stuart Neely and Robin Brooks, “Human Rights Due
Diligence in Law and Practice: Good Practices and Challenges of Business Enterprises” (2017) 2 Business and Human Rights Journal 195–224. 144 The Corporate Human Rights Benchmark (“CHRB”) is a collaboration led by investors and civil society organisations
dedicated to creating the first open and public benchmark of corporate human rights performance, available at:
www.corporatebenchmark.org. 145 CHRB, “2018 Key Finding - Apparel, Agricultural Products and Extractive Companies”, 2018, available at:
https://www.corporatebenchmark.org/sites/default/files/documents/CHRBKeyFindings2018.pdf at 5. 146 Ibid at 13.
50
As this study was being finalised, the findings of the 2019 CHRB assessment were
published, which show similar results. They indicate that “human rights due diligence is
a key weakness for most companies”,147 with companies scoring on average 21% (3.2
out of 15) under the human rights due diligence assessment area, and nearly half (49%)
of the companies assessed (which were doubled in 2019) scoring zero against every
human rights due diligence indicator.148 It is noted that the CHRB relies on public reports
to allocate these scores, which again highlights the concern raised by stakeholders that
there are discrepancies between companies’ public reports and what they are doing in
reality.
In a similar vein, a recently published report focusing on Irish companies's engagement
with business and human rights revealed a weak performance of Irish companies across
the board, and identified a particular weakness in the area of embedding respect for
human rights and human rights due diligence, with companies scoring an average of just
2% on human rights due diligence.149
One interviewee in an organisation which works with companies on their due diligence
practices, particularly in their supply chains, described the current situation as follows:
It feels like we are essentially offshoring exploitation…European countries have
essentially outsourced that, relocated factories to countries where the cost of
production is very low and where governance [is actually] problematic, and
recreated that industry.
They're sourcing from places where they know these conditions would be
prohibited at home. No payment that meets minimum wage or very, very long
working hours, and working in structurally unsound factories or whatever it might
be. The unfair labour practices continue. They're just going on in places where
local governments are unable or unwilling to import domestic or international
labour rights legislation.
Scope of due diligence 4.2
Whether due diligence practices currently include environmental and climate
change due diligence?
As will be seen below, the vast majority of business stakeholders expressly include
environmental impacts in their due diligence, and many others view environmental
impacts as implied as included.150
147 CHRB, "2019 Key Findings - Across sectors: Agricultural Products, Apparel, Extractives & ICT Manufacturing, available at:
https://www.corporatebenchmark.org/sites/default/files/2019-11/CHRB2019KeyFindingsReport.pdf, at 8. 148 Ibid at 8. 149 B. Finlay Hogan, M.L. Rhodes, S.P. Murphy, and M. Lawlor, "Irish Business & Human Rights: Benchmarking compliance with
the UN Guiding Principles", Centre for Social Innovation, Trinity Business School, 8 November 2019, available at: https://www.tcd.ie/business/assets/pdf/CSI-BHR-Report-1.pdf 150 It is noted that both the BIICL study above n 143 and the CHRB report ibid focused on human rights due diligence which
covers all human rights, whereas the survey for this study included other categories of due diligence such as those relating to
other areas only, and exclusive environmental due diligence. In a later part of the survey, discussed below, survey
respondents were asked about their preferences for different regulatory options. This included a question about “issue-specific”
regulation which covers only one specific human rights or environmental issue. Although this question was not specifically
about the inclusion of environmental impacts in current due diligence practices, some comments from business survey
respondents were relevant. For example:
“There could be merit in considering all human rights in one harmonised way rather than one human right at a time.
Including all environmental impacts in the same may prove to be too challenging and needs to be considered whether they go naturally hand in hand or whether it becomes very difficult to implement. The process of due diligence is similar for both.”
“The UNGP lay the foundation and are clear in acting upon all recognised human rights. At the same time, the concept of
including (all) environmental impacts, is not elaborated yet. As long as human rights are also to be seen with environmental
impacts, these are covered. However, on environmental impacts in general, lots of literature, advice and regulation exists. To
put everything in one concept does not help to clarify things, but in my view, distracts from the main issues. Therefore I would
recommend at the moment to view the issues in a holistic way, without blurring (established) concepts. Also, you may
consider that different people/ departments are in general responsible for environmental issues and human rights due
51
Given the mandate of this study, survey respondents were also asked specific questions
regarding due diligence for climate change impacts. Although survey respondents
indicated that the term “climate change due diligence” is currently rarely used as a self-
standing form of due diligence (see below), business respondents indicated that
environmental impacts including aspects of climate change, air pollution and greenhouse
gas emissions are viewed by business survey respondents as included, either expressly
or implied, within existing due diligence processes.
When asked which aspects are currently expressly included in their due diligence, or
“implied as included (though not expressly mentioned)”, business respondents indicated
that environment is expressly included (85.84%) or implied as included (14.16%). Air
pollution and greenhouse gas emissions are expressly included (77.88%) or implied as
included (22.12%), and climate change is expressly included (60.20%) or implied as
included (39.80%). Biodiversity is expressly included by 44.83% or implied as included
by 55.17%.
These trends were even more pronounced within large companies with over 1000
employees: The top issues selected as “expressly included” within their due diligence
processes were labour rights (selected by 90 respondents out of the 100 which
responded to the question), non-discrimination and equality (85 respondents), health
and safety (83 respondents), environment (75 respondents), air pollution / greenhouse
gas emissions (65 respondents) and climate change (49 respondents). Top issues
selected as “implied as included (though not expressly included)” were land rights (40
respondents), indigenous communities (37 respondents), biodiversity (35 respondents),
profit-shifting to low tax jurisdictions (33 respondents), climate change (28 respondents)
and income inequality (28 respondents).
It is interesting to note that a relatively large proportion of large (1000+ employees)
business respondents view climate change and air pollution / greenhouse gas emissions
as expressly included in their due diligence processes, and just under a third view
climate change as implied as included.
An international and comparative environmental law expert, Ivano Alogna, who
specializes in the legal models used for environmental regulation, explained in an
informational call that there is currently a "bricolage" of legal instruments aimed at the
protection of the environment:
It is a history made of principles influencing legal instruments, soft law hardening
such as from voluntary CSR to hard law obligations, and an enormous amount of
legal tools for the protection of the environment...Yet, I believe that currently,
the first and only example of legislation which requires companies to exercise a
‘duty of vigilance of parent and outsourcing companies’ for environmental harm is
the French [Duty of Vigilance] Law. Other environmental laws or standards are
either soft law instruments, or they apply legal duties to States...The French law
is the first legislative model worldwide that places the burden of responsibility of
prevention on the multinational company, which incurs its civil liability for its
activities and environmental externalities...Considering the recognized
importance of a legally binding instrument to regulate the activity of transnational
corporations, stressed in particular by the efforts made by the UNHRC in this
direction, this new legal model may offer a solid foundation to draft a European
instrument of this kind.
diligence. Collaboration is needed and needs to be improved, yet realistically this will take some time. Human rights due
diligence, though the UNGP in its 8th year, are still a "new" concept for most businesses, and other stakeholders alike.”
52
Interviewees also suggested that insofar as climate change impacts have impacts on
people (also in the long run), they are already viewed within scope of human rights due
diligence as it originated from the UNGPs. An interviewee from an international civil
society organisation indicated:
We have only really just begun to look at the relevance of due diligence for
tackling climate change. And it has been and it will always be in relation to the
human rights impacts of climate change and the contribution of companies, most
probably fossil fuel companies, to those human rights impacts as a consequence
of their failure to reduce their greenhouse emissions, to reduce their reliance on
fossil fuels, to shift to clean energy etcetera…
The interviewee continued to highlight that insofar as the focus is on what the company
can do to address its impacts, due diligence responsibilities extend to climate change
impacts:
What I would say for sure is that the extent to which you can link a company’s
failure to do what is within its remit to do, to tackle climate change, and that
leads to a negative impact on human rights, we would consider that to be within
the remit of their due diligence responsibilities.
Another interviewee from an international civil society organisation also highlighted that
the UNGPs concept of due diligence is a methodology by which a company should
identify, assess and address its impacts on people. This same methodology may
potentially be used to address questions about environmental harms, including climate
change:
I think we have to distinguish between due diligence as an instrument, and then
what kind of risks the instrument has to identify. And so what kind of process,
and whether the process would actually change as part of what kind of risks are
we looking at. [T]he particular part of human rights due diligence is, for instance,
the specific role of the rights-holder, so communities and the part of the
instrument that uses consultations and engagement with the stakeholders to
identify but also mitigate risks…
But due diligence as such, the idea of having due diligence embedded in
management structures, having a process in place to identify specific risks, in this
case the human rights, the basic methodology is the same. But the UNGPs
provide a framework for particular human rights risks where you have people,
communities, stakeholders as part of the methodology.
An interviewee from another civil society organisation, which is currently campaigning
for mandatory due diligence in an EU Member State, stated:
I would actually challenge the view that an environmental impact does not have a
human rights impact. I think it pretty much always does. Even if it’s not an
immediate impact. Even if it’s not: ‘There was pollution and I cannot farm on my
land anymore’. At perhaps a couple of steps removed, there is always an impact.
And obviously in climate change there is an impact on everyone, arguably.
The interviewee highlighted that many of the groups which are working on
environmental issues are in fact focused on the environmental impacts on people:
There is whole group of people working on deforestation, but the primary reason
that they are interested in that is because of the impacts it has on people that
rely on forestry for their livelihoods. So again you can make the connection to
human rights and that’s what we would do.
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The idea that companies have responsibilities for their climate change impacts are not
new. For example, in 2018 the UN Climate Change Secretariat has proposed a fashion
industry charter for climate action,151 which was supported by Stella McCartney, who
stated: “What is essential is for the big players in the industry to come along with me,
because that changes the price point.”152 Similarly, although the Paris Agreement applies
to States, it contains a workstream regarding how business and states can work
together.153
However, until recently, it has not been clear how an individual company’s due diligence
should include its impacts on climate change. It was seen to be difficult to ascribe
proportional responsibility to one company for something that has global contributors.
For example, an interviewee who is a legal expert on the development of the Swiss
Responsible Business Initiative proposal for mandatory due diligence legislation was of
the opinion that climate change litigation would most probably not be included within
scope of that law, “due to the very unclear scope of what climate change can be”. They
indicated that the Swiss legal proposal would be “more focused on civil damages and
civil remedies that we already know.”
Another interviewee added that legal duties for due diligence regarding the environment
can be “quite different to what we are talking about here, because it’s very vague in
terms of how you would actually assess as whether you had fulfilled that duty or not and
how you would be held to account for not doing so.” They added:
With climate, a lot of the efforts have gone into things like reducing resource use
and reducing carbon emissions. But people think that that has only taken them so
far, and now they are looking at things like the climate litigation. The question for
them is how to you deal business activities that are fundamentally not
sustainable, the oil industry for instance.
Perhaps for these reasons, due diligence practices for human rights and climate change
respectively have to a certain extent developed in “silos” within companies. An
interviewee from a multinational food and drink company indicated about their
company’s due diligence work, which they call “human rights due diligence”:
In terms of scope of the substance, the issues, we are really focused on human
rights, on the Universal Declaration of Human Rights and the relevant
Conventions. So I would say that while we have been able to look at impact of
environmental issues on people, we have not carried out per se like a climate
change due diligence process, I would say, at least not as part of the human
rights due diligence programme. Now, of course, you know, we have people
working in operations, that actually look after climate change in particular…Really
trying to understand better [the] Scope 1, 2, 3 emissions, and we are engaging
with suppliers. But this is quite separate from our human rights due diligence
programme.
One interviewee from a multinational garment company indicated, with respect to the
company’s environmental and human rights due diligence teams:
151 UN Climate Change, “Fashion Industry, UN Pursue Climate Action for Sustainable Development:, 22 January 2018, available
at: https://unfccc.int/news/fashion-industry-un-pursue-climate-action-for-sustainable-development. 152 Jess Cartner-Morley, “Stella McCartney to launch UN charter for sustainable fashion”, The Guardian, 29 November 2018,
available at: https://www.theguardian.com/fashion/2018/nov/29/stella-mccartney-to-launch-un-charter-sustainable-fashion. 153 Samantha Harris, “Ambitious Climate Action Before 2020, Business Should Focus on ‘Workstream 2’“, BSR, 5 June 2015,
available at: https://www.bsr.org/en/our-insights/blog-view/for-ambitious-climate-action-before-2020-business-should-focus-
on-workstrea.
54
We are from the same area, same department [sustainability], we do have
similar processes. We started together, we have developed internal tools. These
tools are shared in the environmental and social or human rights teams, and also
used by our commercial colleagues, the ones that buy the garments. The type
and process of due diligence is quite similar. Same scopes, same visibility…
In my company, we are pushing it from the social sustainability department
towards the rest of the company and their processes and areas of the company:
human resources, logistics, distributions centres, in our stores, etcetera. Because
for us, in our sector, it makes sense. We have been building almost two decades
of expertise in due diligence in human rights, even from before the Guiding
Principles were out. So we have our own processes of due diligence, and our
ways of calling it. And what we have been doing since 2011 is making sure that
our own processes are aligned with the Guiding Principles, and we have been
trying to understand if what we are doing is enough. So with that expertise that
we have from the human rights part of the supply chain, the company understood
that the mandate to extend the due diligence to the rest of the company should
come from our area. So this is what we are doing, and I am the person
responsible for doing that.
The interviewee further explained:
Environmental covers the whole cycle: supply chain and logistics, eco-efficient
stores, recycling, second life of the product. They have a circular, and then our
paths cross when it comes to supply chain, and there we work together.
An interviewee from a company which has undertaken dedicated due diligence in its
supply chain indicated:
One of the things that we do is a life-cycle assessment on our products. Which
means that we look at different tiers of the supply chain and their emissions of
greenhouse gases, and different aspects of where the impacts are and where our
environmental footprint is the biggest. And that goes all the way from the
materials that are used to the actual used phase of the product. And there is also
the energy used, repairs that needs to be done, etcetera. In that full life-cycle,
we focus mostly on where we can have the most influence. Which is actually in
the used phase, so designing products that actually are facilitating repairs. So
people don't throw away, but can reuse parts as much as possible.
The interviewee further added:
There are examples of other manufacturers that do life-cycle analysis but I don't
think it is common practice.
As discussed in the Regulatory Review section, very recent developments indicate that
the understanding of how precisely climate change impacts can form part of due
diligence is evolving rapidly. For example, during the course of the empirical phase of
this study, the OECD National Contact Point in the Netherlands for the first time clarified
how climate change targets can be understood as being expressly part of a company’s
due diligence responsibilities.154 As a result of these developments, there seems to be a
growing acknowledgement that climate change impacts are to be viewed within the
company’s own due diligence responsibilities.
154 The Netherlands National Contact Point for the OECD Guidelines for Multinational Enterprises, Oxfam Novib, Greenpeace
Netherlands, BankTrack and Friends of the Earth Netherlands (Milieudefensie) versus ING, Final Statement, 19 April 2019,
available at: https://www.oecdguidelines.nl/documents/publication/2019/04/19/ncp-final-statement-4-ngos-vs-ing. See
discussion in Regulatory Review.
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These developments are also taking shape within business. At the April 2019 Sustainable
Europe 2030 conference, Saori DuBourg of BASF indicated:155
“What I see right now, and this is true for the entire industry, there is a concern
that increasing effort from the industry…how can we now go further to really
meet the Paris Protocol?”
Other recent developments in this regard include:
On 17 June 2019, the Financial Times published an article on a new metric by
Carbon Delta, which analysis how companies are addressing their climate change
impacts, including how they are meeting their own targets set in response to the
Paris Agreement. The article starts by stating that: “It has been a big week for
climate change — and the companies trying to tackle it.”156
Also on 17 June 2019, 88 investors worth almost US$10 trillion indicated that
they will push for more disclosure on environmental impacts, including climate
change, water and deforestations.157
On the following day, 18 June 2019, the EU published its Non-Binding Guidelines
on corporate Climate-related information reporting, which indicate that in terms
of reporting under the EU non-financial reporting directive, "climate-related
information can be considered to fall into the category of environmental
matters".158
On 25 June 2019, a report from the UN Special Rapporteur on extreme poverty
and human rights reaffirmed the impact of climate change on human rights in no
uncertain terms. The report criticises states and other actors for “giving only
marginal attention to human rights in the conversation on climate change”159
for
decades, and that “as a full-blown crisis bears down on the world, business as
usual is a response that invites disaster”.160
It emphasises the role to be played
by companies, alongside other actors, in providing and implementing solutions to
climate change, 161
through “a radically more robust, detailed, and coordinated
approach”.162
A July 2019 report by ClientEarth and Global Witness makes the case for "a
generalised due diligence obligation on all EU-based companies providing goods
or services in the EU (including financial activities)”.163
The Task Force on Climate-Related Financial Disclosures provides companies with
recommendations for climate-related financial disclosures. It is a voluntary reporting
155 Saori DuBourg, BASF, presentation at Conference on Sustainable Europe 2030: From Goals to Delivery, 8 April 2019,
Brussels, video available at: https://ec.europa.eu/epsc/events/sustainable-europe-
2030_en?pk_source=participants_list&pk_medium=email&pk_campaign=sdg-conf. 156 Leslie Hook, “World’s top 500 companies set to miss Paris climate goals”, Financial Times, 17 June 2019. 157 CDP, “Group of 88 investors target over 700 companies for not reporting environmental information”, 17 June 2019,
available at: https://www.cdp.net/en/articles/media/group-of-88-investors-target-over-700-companies-for-not-reporting-
environmental-information. 158 EU Guidelines on non-financial reporting: Supplement on reporting climate-related information, C/2019/4490 of June 2019. 159 Report of the Special Rapporteur on extreme poverty and human rights, “Climate change and poverty“, A/HRC/41/39 (July 2019), available at: https://documents-dds-ny.un.org/doc/UNDOC/GEN/G19/218/66/PDF/G1921866.pdf?OpenElement at 1. 160 Ibid at 3. 161 Ibid. 162 Ibid at 1. 163 ClientEarth and Global Witness, "Strengthening Corporate Responsibility: The case for mandatory due diligence in the EU to
protect people and the planet", July 2019, available at: https://www.globalwitness.org/en/campaigns/forests/strengthening-
corporate-responsibility/ at 14.
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initiative aimed at generating information relating to climate impacts that are
“consistent, comparable, reliable, clear, and efficient, and provide decision-useful
information to lenders, insurers, and investors”.164
In September 2019 an investor statement coordinated by UN Principles for
Responsible Investment (PRI) called on investee companies to take disclose and
implement “quantifiable, time-bound commitments covering the entire supply
chain and sourcing geographies” relating to their deforestation impacts in the
context of climate change.165
During November 2019, the European Investment Bank has announced that as of
the end of 2021 it will no longer finance most fossil fuel projects.166
Given the recent nature of these developments, they are likely to not have influenced
the findings of our empirical study, which took place during or prior to many of these
developments. However, their implications for the evolving understanding of corporate
due diligence expectations are discussed in the Regulatory Review section.
Whether due diligence practices currently include due diligence for wider social
aspects such as income inequality and profit-shifting to lower tax jurisdictions?
Of business survey respondents, 54.76% indicated that income inequality is expressly
included in their due diligence, and 45.24% that it is “implied as included (though not
expressly mentioned)”. Profit-shifting to lower tax jurisdictions is expressly included in
25.8% of business respondents’ due diligence, but in 74.15% it is implied as included.
However, questions as to how to link these wider social impacts with company’s own
individual impacts and due diligence efforts are still relatively new. An interviewee who
works with businesses in the implementation of the UNGPs indicated that:
The majority of companies that we're dealing with are still struggling with some
of the human rights impacts that we would consider very familiar. But the minute
you talk about income inequality and inequality more broadly, certainly we see
that as going hand in hand with the negative impacts we see as a result of
globalization and we see just [a] general trend of how societies are operating and
distributing income. And so, issues like living wage are really moving up the
agenda quickly. We've done quite a bit of work to emphasize from an SDGs
perspective how this is an issue that, if you want to talk about transformation at
scale, don't just talk about inventing new social products and services, look at
how you can drive a living wage through your entire supply chain. That would be
utterly transformational. Nobody is doing that really right now. Which comes back
to where I started, about: Are you actually willing to make the decision that this
may have some business costs for you in order to really get to better outcomes?
So I think the inequality piece is very closely connected, and we're often trying to
explain to companies or help them see how addressing negative impacts is just
the other side of the coin to what the SDGs are calling for. And of course for
many companies the SDGs are a driver at the moment.
An interviewee from an international network of NGOs which promotes corporate
accountability with a particular focus on the OECD Guidelines, stated that:
164 Task Force of Climate-Related Financial Disclosures, available at: https://www.fsb-tcfd.org/about/. 165 UN PRI, “Investor statement on deforestation and forest fires in the Amazon” September 2019, available at
https://d8g8t13e9vf2o.cloudfront.net/Uploads/g/i/u/investorstatementondeforestationandforestfiresintheamazon_76915.pdf. 166 “European Investment Bank drops fossil fuel funding”, BBC News, 14 November 2019, available at:
https://www.bbc.co.uk/news/business-50427873.
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Fiscal planning and fair taxes is included in the OECD Guidelines as a Chapter,
and there has been an increasing attention to responsible tax practices and fair
payment of tax as a corporate accountability issue. Though, interestingly the tax
Chapter is explicitly excluded from the due diligence requirements in the OECD
Guidelines.
One interviewee working for a multinational company indicated:
We are not looking at this stage as to whether our tax footprint is related to those
topics. If any companies are thinking that way, they are a small minority.
Again, interviewees indicated that whereas wider social impacts are not always expressly
included, a due diligence process that focuses on the company’s impacts on those
affected may well need to focus on wider social impacts. After explaining that the
starting point of any mandatory due diligence regulation should be the UNGPs, for
clarity, an interviewee from an international food and drinks company explained:
So this is one thing. Now, having said that, over the years, what we have seen,
your due diligence itself, in terms of identifying risks and impacts, even though
you actually do focus on, I would say, pure human rights issues, actually
remediation activities lead you into territories that go much further than just the
human rights framework. I always use the example of child labour, which is a
quite specific issue, well-defined by the ILO Conventions, and so forth. But then,
when it comes to remediation, if the company actually decides…like in our case if
we decide to go into remediation for different reasons, that actually leads us into
activities that relate to school building, improving access to education, that
actually go, in my view, much further than just the human rights framework, that
actually have a direct connection and link with the SDGs and developmental
agenda. And I think this is important to recognise that.
But it’s more as part of the remediation than as part of the process, I would say.
Because if you start too broad with the identification or assessment process, I
think you will lose a lot of companies, and also a lot of clarity in terms of what
you expect from them.
A few interviewees highlighted that issues such as tax and profit-shifting are usually
already highly regulated, including in criminal law. They raised the point that a new
regulatory mechanism which provides for a civil remedy or a due diligence defence,
should not be used to override and water down existing criminal law provisions. An
interview from civil society which is campaigning for a national-level mandatory due
diligence law explained:
Someone said we should be explicit in our materials that it does include tax
avoidance, and that it includes anti-corruption measures as well. Again, I would
say that it does, because those things have human rights impacts. But I think
part of the reason that it has not been in there explicitly up until now is again just
to do with the fact that these movements have been separate. It’s kind of a silo-
ing issue. There has been a big NGO movement on tax. It’s a very complex area.
People are only just beginning to conceive of tax evasion as a human rights issue.
So whether you would need to be explicit about that or not, you would need to
think quite carefully…because if the accountability model is civil liability, then can
you use that to hold them to account for non-payment of tax? That’s where it
becomes tricky.
When asked whether some large issues like tax and income inequality can only be
addressed at government or policy level, rather than by individual companies, the
interviewee added:
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We need to be slightly careful about that. Some sectors will need to get together
and work together where there is an endemic problem, and see where they can
work with governments on something that is at a very macro level like tax. There
are associations of businesses that are serious about tax, climate, but ultimately
that is a policy issue.
It is also noted that the social, environmental and human rights impacts of corporate
taxation are complex and contested. A recent study for the European Economic and
Social Committee found that:167
There is a wide consensus that part of the corporate tax is passed on to people
other than the shareholders. The IMF has noted that ‘workers, not shareholders,
bear the real incidence of the corporate income tax.’ Studies find the tax burden
on workers of corporate tax ranges from 30% to 400%. But much public
discussion fails to acknowledge the importance of incidence. Neither the European
Commission’s Communication on the digital tax or the accompanying 161-page
impact assessment contain the word ‘incidence’.
The study also refers to a study by Fuest et al (2017) which notes that “higher taxes
reduce wages most for the low-skilled, for women, and for young workers”.168 These
impacts fall outside the scope of this study. However, we note that for these reasons,
caution should be taken when considering the extension of due diligence to corporate tax
questions.
Case study: BASF and Value-to-Society
BASF is a multinational chemical company headquartered in Germany. The company has
developed what it calls the ”first monetary assessment of the economic, ecological, and
social impacts of its business activities along the value chain”.169 The model, which it
calls Value-to-Society, measures in euros the value of BASF’s activities along its supply
chain.170
The model aims at being pragmatic, scalable, transferable and auditable in a way that
allows the company to monitor its externalities in a transparent manner.171 BASF’s
objective is to allow the public to understand the company’s impact from the model’s
figures.
The scope of the model includes both direct and indirect suppliers, the company’s own
operations, and customer industries in the downstream value chain.172 Further, the
model classifies impact in different categories, such as profits, taxes, wages, human
capital, health and safety, air pollution, greenhouse gases, water pollution, solid waste,
land use, and water consumption.173
This novel approach to corporate impact assessment seems to be an interesting
communication tool to show the BASF’s commitment to the environment and society.
167 Pieter Baert, Frederik Lange and James Watson “The Role of Taxes on Investment to Increase Jobs in the EU – An
Assessment of Recent Policy Developments in the Field of Corporate Taxes”, Study for the EU Economic and Social Committee
(May 2019), available at: https://www.eesc.europa.eu/sites/default/files/files/qe-03-19-343-en-n.pdf, at 1. 168 Reference made to Clemens Fuest, Andreas Peichl, Sebastian Siegloch: “The incidence of corporate taxation and its
implications for tax progressivity” (2017), referred to in Baert et al ibid at 21. 169 BASF, "We create value", available at: https://www.basf.com/global/en/who-we-are/sustainability/we-drive-sustainable-solutions/quantifying-sustainability/we-create-value.html; and BASF " BASF’s Value-to-Society: Results 2013-2018 at Group
level", available at: https://www.basf.com/global/en/who-we-are/sustainability/we-drive-sustainable-solutions/quantifying-
sustainability/we-create-value/impact-categories.html. 170 Ibid. 171 Dirk Voeste and Christian Heller, "BASF’S Value-to-Society" The Reporting Times (May 2018) 10. 172 "We Create Value" above n 169. 173 Ibid.
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Nevertheless, it is noted that there are limitations to measuring these impacts in
monetary terms, or financially quantifying respect for human rights.
Language used to describe due diligence 4.3
Respondents were asked what language they use to describe their due diligence
processes. However, it should be noted that the survey responses and interviews
demonstrates that terminology differs from one user to the next: one company’s “human
rights due diligence” process may cover a different or wider set of issues or go deeper
into the supply chain than the process which another respondent has described with a
similar name. Similarly, different companies describe very similar or identical processes,
roles and responsibilities using different terms.
The terminology selected by most business respondents (32.43%) and general
respondents (54.10%) is “human rights due diligence”. This is followed by a mix of other
phrases (18.92% business, 36.61% general) related to supply chain due diligence,
supplier codes of conduct or ethical sourcing. In the business survey, the third most-
selected phrase was “sustainability due diligence”, but only selected by a few (14.19%),
and followed closely by “social, environmental and human rights due diligence”
(13.51%). In the general survey, “social, environmental and human rights due diligence”
was the third most-selected options, by 35.52%, before “sustainability due diligence”,
selected by 30.05%.
Only 1.35% of business respondents and only 6.56% of general respondents use the
phrase “climate change due diligence”, which was the least selected phrase in both
surveys. Noting the above-mentioned responses regarding the frequency with which
climate change impacts are viewed as either expressly or implicitly included in due
diligence processes, this infrequent use of the phrase “climate change due diligence”
predominantly suggests that self-standing processes which focus exclusively on climate
change are rare.
Answers provided by industry organisations in optional text boxes also emphasise that
“each company has its own terminology to describe due diligence processes”. Areas
which are commonly covered, despite the chosen language used to describe the process,
include “human rights, anti-bribery, environment, climate change, social issues.” It was
also noted that many companies use the phrase environmental, social and governance
or “ESG” due diligence.
Interviewees suggested that any regulatory mechanism should build upon the influence
and strength of the due diligence concept of the UNGPs. Several references were made
to the uptake which the UNGPs have had, also in terms of due diligence expectations
contained in the OECD Guidelines and other mechanisms. The OECD Guidelines were
frequently mentioned as an example of how the UNGPs concept of due diligence can be
expanded and applied to other areas of responsible business conduct such as impacts on
the environment and climate change. John Ruggie described the revised OECD
Guidelines “the first [inter-governmental instrument] to take the Guiding Principles’
concept of risk-based due diligence for human rights impacts and extend it to all major
areas of business ethics.”174
174 OECD “OECD Guidelines for Multinational Enterprises: Responsible Business Conduct Matters” (“OECD RBC Guidance”),
available at: http://mneguidelines.oecd.org/MNEguidelines_RBCmatters.pdf at 5.
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Regarding building on the strength of the concept of due diligence which was introduced
by the UNGPs and embedded in the OECD framework, an interviewee from a
multinational food and drinks company indicated:
I think the Guiding Principles were quite clear in terms of the scope that was
expected from companies in terms of human rights due diligence. And this is
really the starting point. And the reference should be internationally recognised
human rights, based on the Universal Declaration and the two Covenants. And I
think, you know, this is clear, and I think this is a plus, that there is clarity in
terms of what is expected from companies, because it does actually provide a
framework, a clear framework for business so they know what they need to abide
by. And I think that differentiates the Guiding Principles from other standards
where the definition of the scope, or the reference framework is a bit less clear.
And I am sure you know that clarity, for business, is at the essence.
An interviewee from an international civil society organisation argued that the focus on
the normative framework is extremely helpful for companies, and that this concept
should be retained:
[H]uman rights due diligence is a concept that is still relatively new. It took many
years for people to get their heads around the fact that this is not the commercial
due diligence that companies are used to, and corporate lawyers are used to, and
generally the commercial world is used to. This is to do with the human rights
impacts of the rights-holders.
The interviewee continued to emphasise that the strength of this framework should be
built upon rather than abandoned:
And I think it would be tremendously dangerous to now start doing away with the
concept for something broader to incorporate all existing social values. And
ditching that concept. I think it’s too premature. And in fact it’s not been
sufficiently practised…It took a long time to convince a lot of people to start using
it and it would be very dangerous in terms of normative developments to now
ditch the concept.
The interviewee thereafter raised a concern which was shared by a few interviewees,
namely at the suggestion of changing the language of “human rights due diligence”,
which interviewees described as “clear”, to “sustainability due diligence”, a concept
which they described as “vague”:
I think not referring to human rights in due diligence risks dissipating…the focus.
And we could go back to environmental and social impact assessments. Which
really, if they were performed properly, they were about sustainability. And we, in
our own work, when we looked at environmental and social impact assessments,
the social aspect of the impact assessment really didn’t ever cover the human
rights. It may have done it in a generic manner, it may have done it in a large-
scale manner, but it never looked at the human rights of each individual, and for
instance, the human rights of women in particular. [T]he human rights lens
actually allows you to look at the differentiated impact on each individual of a
particular activity or project, and I think you could end up going back to the
social impact assessments by talking “sustainability”. So I think it would be
dangerous.
And the other thing, talking “human rights due diligence”, also forces the
company performing it to look at the right normative framework. They need to
look at international human rights law. So basically, again, talking about
sustainability risks dissipating that message that what you need to make sure you
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respect here and abide by and use as your benchmark is international human
rights standards. When it comes to children, you know, what does that look like
in terms of children’s rights, and women, and etcetera.
The general view of most stakeholders was that the UNGPs concept of due diligence
(which has influenced the OECD Guidelines and other regulatory mechanisms) is useful
insofar as it focuses on the steps which each individual company can be expected to take
for its risks of external impacts. For example, one interviewee from an international
trade association who works with large consumer-facing companies on their due
diligence practices stated:
[M]ost [of our brands] have adopted the UNGP approach in terms of recognizing
that due diligence is about with the workers, recognizing that it is about actual
avoidance of potential risks. I think most are on board with that definition, and
they'll need to engage in identification of salient risks and prioritization. Then
developing a strategic plan for the fine-tuned due diligence approaches.
An interviewee from a multinational food and drinks company similarly indicated that the
clarity of the concept of due diligence introduced by the UNGPs has been very helpful:
When it comes to think [about] regulation [or] legislation, for us, the focus of
such legislation should be to a kind of implementation of the UN Guiding
Principles. Because the framework of the Guiding Principles is already quite well
understandable, but still not mandatory. And it is a bit the weakness of this
framework. So when it comes to go towards mandatory due diligence, the
reference should stay the UN Guiding Principles. Otherwise, you will lose
companies, even those who are maybe well-advanced or leaders. Because
without clarity of the intention of the legislators business cannot really operate in
good conditions.
Interviewees noted that usefulness of the language of the UNGPs for introduction into a
legal standard with references to the French Duty of Vigilance Law. As noted also in the
Regulatory Review and the France Country Report, the background materials of the
French law expressly state that the UNGPs form the frame of reference for the French
law. An interviewee from a French business organisation stated that:
We consider that the [French] law is a transposition of the UNGPs (...) We use
the UNGPs to interpret this law because it is a loi cadre and nobody explained
how to interpret the law.
Evidencing the usefulness of the UNGPs concepts for stakeholders across the spectrum,
when asked how companies could improve their due diligence practices, a survey
respondent from an industry organisation indicated in an optional text box:
Sectors and companies not using/ following UN Guiding principles or similar
practices need to start doing that.
Case study: Vattenfall and Limiting Environmental Damage
Vattenfall is a Swedish state-owned energy company. It produces electricity and heat,
and conducts sales operations in both segments. Vattenfall’s main markets are
Denmark, Finland, the Netherlands, Germany, the United Kingdom, and Sweden. It
provides an example of an energy company actively engaging in due diligence which also
includes climate change.
62
In 2016, the German environmental and human rights organisation Urgewald published
a report entitled “Energy You Want?: Vattenfall's Dark Side”. It described Vattenfall’s
customer relationship to mining companies in the north of Colombia which were found to
employ private armies, and to be a key source of financing for a paramilitary group
which had killed over 3,100 people in the coal mining region between 1996 and 2006.175
In addition, the report pointed out that Vattenfall still owned mines and power stations in
Germany where lignite – a highly CO2-polluting type of coal – was extracted or burnt.
The report blamed the company for selling its lignite assets instead of beginning a
phase-out of them.176
Vattenfall responded to this report with two letters, addressing its “decision to reduce its
CO2 exposure and to grow in renewables” as a “responsible seller”.177 It also pointed to
its policy of not directly sourcing from Colombian companies that do not “publicly
condemn any human rights violations in the past which took place in the region where
they operate currently, publicly support the Colombian Peace Process and publicly
support a reconciliation procedure for the victims of past human rights violations”.178
Currently, Vattenfall’s social responsibility strategy publicly asserts that the company is
committed to increasing its leverage throughout its supply chain, to fostering
engagement with its suppliers, and to enhancing suppliers' sustainability performance.179
These principles are reflected in Vattenfall’s Code of Conduct for Suppliers, whereby
Vattenfall reserves “the right to conduct due diligence by regularly and systematically
identifying and assessing human and labour rights, environment and business ethics
related risks and impacts in its supply chain” in order to mitigate impacts and ensure
responsible sourcing.180 Further, the company publishes its human rights,181
sustainability,182 and environmental policies.183
Regarding the introduction of carbon reduction in its due diligence process, Vattenfall
has publicly committed to reducing its CO2 emissions by establishing a roadmap whereby
it will “completely phase out coal in its heat portfolio in Germany and the Netherlands by
2030” and “become totally climate neutral in the Nordic region by 2030”.184 This appears
to show a change in the company’s strategy, since in the past it filed two investor-state
claims under the Energy Charter Treaty against Germany’s policies on restrictions of coal
(2009) and on the phase-out of two nuclear plants (2012).185 The first claim was settled
175 Endcoal, "Energy You Want? Vattenfall’s Dark Side" (April 2016), available at: https://endcoal.org/resources/energy-you-
want-vattenfalls-dark-side/. 176 Business & Human Rights Resource Centre ("BHRRC") "Vattenfall Continues to Buy Coal from Conflict Zones & Emit High
CO2 Emissions despite Climate Goals" (May 2016), available at: https://www.business-humanrights.org/en/vattenfall-
continues-to-buy-coal-from-conflict-zones-emit-high-co2-emissions-despite-climate-goals-company-response-provided. 177 Annika Ramsköld, "Vattenfall’s Response to Urgewald Report" (13 May 2016), available at: https://www.business-
humanrights.org/sites/default/files/documents/20160513_Vattenfall%27s%20response_Business%20and%20Human%20Right
s%20Centre_Urgewald%20report.pdf. 178 Vattenfall, "Vattenfall Views on Hard Coal Sourcing from Colombia" (13 May 2016), available at:
https://corporate.vattenfall.com/globalassets/corporate/sustainability/doc/statement_vattenfalls_views_on_hard_coal_sourcin
g_from_colombia_final_130516.pdf. 179 Vattenfall, "Supply Chain Responsibility", available at: https://group.vattenfall.com/who-we-are/sustainability/social-
responsibility/supply-chain-responsibility. 180 Vattenfall, "Code of Conduct for Suppliers" (July 2017) available at: https://group.vattenfall.com/siteassets/corporate/who-
we-are/about_us/suppliers/code_of_conduct_for_suppliers_en_.pdf at 1.5.1. 181 Vattenfall, "Human Rights Policy" (December 2018), available at: https://group.vattenfall.com/siteassets/corporate/who-
we-are/sustainability/doc/human_rights_policy_190320_v02.pdf. 182 Vattenfall, "Sustainability Policy" (December 2018), available at: https://group.vattenfall.com/siteassets/corporate/who-we-
are/sustainability/doc/sustainability_policy_2018.pdf. 183 Vattenfall, "Vattenfall Environmental Policy" (April 2018), available at:
https://group.vattenfall.com/siteassets/corporate/who-we-are/sustainability/doc/181022_environmental_policy_en.pdf. 184 Vattenfall, "CO2 Roadmap", available at: https://group.vattenfall.com/what-we-do/roadmap-to-fossil-freedom/co2-
roadmap. 185 Corporate Europe Observatory ("CEO") and others, "Polluters’ Paradise. How Investor Rights in EU Trade Deals Sabotage
the Fight for Energy Transition" (2015), available at: https://corporateeurope.org/sites/default/files/pollutersparadise.pdf;
Nathalie Bernasconi-Osterwalder and Rhea Tamara Hoffmann, "The German Nuclear Phase-Out Put to the Test in International
Investment Arbitration? Background to the New Dispute Vattenfall v. Germany (II)", International Institute for Sustainable
Development ("IISD") Briefing Note, (June 2012), available at: https://www.iisd.org/pdf/2012/german_nuclear_phase_out.pdf
63
in 2011, after Germany agreed to “water down” the environmental standards.186 The
second is still pending.187 This provides an example of problematic duality between a
company’s (voluntary) corporate social responsibility commitments and its legal
strategies, which, as Cees Van Dam has pointed out, is a recurring tensions within
companies once they publicly commit to human rights and environmental due
diligence.188
Following the concerns raised by Urgewald on Colombian coal suppliers, Vattenfall
conducted and published the first human rights risk assessment on its Colombian coal
supply chain in November 2017.189 The report acknowledges that coal mining in
Colombia had occurred in a context of violence which might have had negative impacts
on many people, and, hence, “companies should take concrete efforts to engage in
constructive dialogue with victims of past human rights violations”.190 The risk
assessment was updated in January 2019,191 where it was disclosed that Vattenfall
removed the mining company Drummond from their list of suppliers given that the latter
decided to discontinue the direct dialogue with the former’s human rights risk
assessment and action plan.192
In sum, Vattenfall provides an example of a company now committed to preventing its
contribution to climate change whilst undertaking novel risk assessments to enhance due
diligence along its supply chain.
Due diligence practices in own operations 4.4
Survey respondents were asked which actions companies currently take to prevent,
mitigate or remedy the adverse human rights and environmental impacts of their own
operations.
Business respondents indicated that the most frequently used actions are training on
human rights or environmental impacts (69.01%) and contractual clauses and codes of
conduct (69.01%), followed closely by audits (67.61%). Internal or external
investigations were selected by 45.77%, and working with human rights and
environmental experts by 40.85%. Other actions selected by business respondents
include additional staff for human rights or environmental measures (35.92%) and
working with local partners (35.92%).
The top most selected actions by general stakeholders about due diligence practices in
companies’ own operations were contractual clauses and codes of conduct (61.76%),
followed by audits (60.29%).
It is noted that here, the views of stakeholders corresponded with the information
provided by companies about their own due diligence practices. However, it is also noted
that both these top actions, namely contractual clauses and codes of conduct, and
at 8; Nathalie Bernasconi-Osterwalder and Martin Dietrich Brauch, "The State of Play in Vattenfall v. Germany II: Leaving the
German Public in the Dark" IISD Briefing note (December 2014), available at: https://www.iisd.org/library/state-play-
vattenfall-v-germany-ii-leaving-german-public-dark at 8. 186 Bernasconi-Osterwalder and Hoffmann ibid at 3. 187 Vattenfall AB and Others v. Federal Republic of Germany ICSID Case No. ARB/12/12, available at:
https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/12/12. 188 Cees Van Dam, Enhancing Human Rights Protection: A Company Lawyer’s Business, Rotterdam School of Management,
Erasmus University (2015) at 37. 189 Vattenfall, "A Human Rights Risk Assessment in Colombia: Vattenfall’s Efforts on Coal Supply Chain Responsibility" (2017,
available at: https://www.business-humanrights.org/sites/default/files/documents/vattenfall_coal_sorcing_report_2017_0.pdf. 190 Ibid at 82. 191 Vattenfall, "Vattenfall’s Efforts on Coal Supply Chain Responsibility: Human Rights Risk Assessment in Colombia – Update
January 2019" (2019), available at: https://group.vattenfall.com/siteassets/corporate/who-we-
are/sustainability/doc/vattenfall_hardcoalsourcingfromcolombia-updatejan2019.pdf. 192 Ibid at 4.
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audits, respectively, relate to an oversight of the impacts of third parties such as
suppliers, and were indeed again selected as the top two actions for due diligence in the
upstream and downstream supply chain below.
The third selected action by general stakeholders relating to due diligence in companies’
own operations was training on human rights and environmental impacts (53.43%),
which was not one of the top selected actions by business stakeholders relating to their
due diligence for own operations.
An interviewee with expertise on business and human rights in Germany indicated that,
due to differences in risks and exposures to date, due diligence practices are more
developed in certain sectors than others:
[I]n the textile or garment sector there is increasing experience of companies,
not only big ones but also medium sized companies, who have started to have
comprehensive human rights due diligence processes. This is of course due to
high exposure of this sector to public scrutiny following well-known catastrophes
in production countries. The more structured, systematic approach of the
garment sector is also due to a government reaction, with the Alliance for
sustainable textile, which is a sectoral multi-stakeholder initiative. This initiative
has already introduced a concept of human rights due diligence to the garment
sector in Germany in a rather broad way.
In other sectors, systematic human rights due diligence apparently is still not the
majority practice. For example in machine engineering, which is one of the
leading and most globalised sectors of German industry, but at the same time
very strongly characterised by SMEs. We hear that there is so far very limited
best practice examples of systematic human rights due diligence.
UNGP 19 indicates that effective integration of due diligence includes the allocation of
resources, and requires that “[r]esponsibility for addressing such impacts is assigned to
the appropriate level and function within the business enterprise”, as well as “[i]nternal
decision-making, budget allocations and oversight processes enable effective responses
to such impacts.”
An interviewee who works with consumer-facing brands on their due diligence practices
indicated:
The majority of [our] companies, I think, they do take this seriously, they're
engaging in due diligence but they're also not dedicating sufficient resources.
The concept of due diligence is based on the acknowledgment that companies do not
have unlimited resources and may prioritise those impacts that are the most “severe”
(defined by the UNGPs and the OECD Guidelines),193 the “most significant”,194 or the
most “salient” (terminology used by the UNGPs Reporting Framework).195 One survey
respondents indicated in an optional text box, when asked in which way current due
diligence practices falls short:
Mainly the need to prioritise, based on salient impacts, rather than tackle
everything at the same time.
193 UNGP 17(b). 194 OECD Guidelines for Multinational Enterprises, 2011, Chapter II, Commentary, paragraph 16: “Where enterprises have
large numbers of suppliers, they are encouraged to identify general areas where the risk of adverse impacts is most significant
and, based on this risk assessment, prioritise suppliers for due diligence.” 195 Shift and Mazars, “The UN Guiding Principles Reporting Framework”, available at: https://www.ungpreporting.org/.
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However, it was emphasized that prioritization should only take place after all actual or
potential issues have been identified and assessed. One interviewee from a multinational
company described this process as follows:
The OECD guidelines say you need to review all the risks and you need to include
the full portfolio of negative impacts. So there is no question about being
selective. You are selective once you have made your risk analysis, in terms of
where you’re going to focus your in-depth due diligence, where to mobilise
resources to mitigate the risk. The issue starts when you’ve got an NGO that is
particularly interested in the development of specific rights, for example women’s
rights in a particular country. And they say you should also focus on women’s
rights. But we say that our assessment shows that we have more severe risks of,
say, child labour. So we are not going to spend our limited resources on that
other risk. That is one big debate.
The concern raised by this interviewee also applies to the question of issue-specific
regulation, discussed below.
Due diligence practices in supply and value chains 4.5
Upstream supply chain
Survey respondents were asked whether current due diligence practices include the
human rights or environmental impacts of third parties in the supply chain or value
chain. The value chain was defined as “the upstream and downstream life cycle of a
product, process, or service, including material sourcing, production, consumption, and
disposal/recycling.”
In the business survey, the majority (51.82%) of respondents who undertake due
diligence indicated that third party impacts are included for first tier suppliers only. Of
the remaining respondents who undertake due diligence, 16.06% indicated that their
due diligence includes the impacts of the entire upstream supply chain, beyond the first
tier, and 16.06% indicated that they include the impacts of the entire value chain, both
upstream and downstream. Of those companies that undertake due diligence, 6.57%
indicated that the impacts of third parties are not included.
An interviewee from a large multinational company indicated:
It is true that we are putting a lot more efforts in subsidiaries that we control and
entities with whom we have direct relationships. This is of course easier and that
is where we put our stronger efforts. ... For instance ... we have committed to an
obligation of result in relation to our controlled subsidiaries to respect and embed
the core ILO Conventions and other international standards, and to do our best
efforts to promote these principles in the non-controlled subsidiaries and along
the supply chain.
The interviewee added:
When we have control it is easier [...] However when we don't have control [with
second tier suppliers, and so on] we are expecting the first tier suppliers who are
having the relationship with their own counterparts to do the same [implement
human rights commitments]. We are not ourselves directly controlling but we are
expecting those people to control.
Survey respondents were asked to indicate which actions companies currently take to
prevent, mitigate or remedy the adverse human rights and environmental impacts of
third parties in their upstream and downstream value chains.
66
“Upstream” activities were defined as including “operations that relate to the initial
stages of producing a good or service, including material sourcing, material processing,
and supplier activities”. "Downstream" activities were defined as including “operations
that relate to processing the materials into a finished product and delivering it to the end
user, including transportation, distribution, consumption and disposal/recycling.” We
asked investor companies to answer questions about suppliers with respect to investee
companies, where possible.
For business and general respondents alike, contractual clauses and codes of conduct
were the most frequently selected actions in both upstream and downstream value
chains. This was followed by audits as the second most frequently used action in both
the upstream and downstream value chain, similarly selected as such by both business
and general respondents.
Further activities used in the upstream supply chain include, in order of selection,
engagement or leverage with suppliers, and training on human rights and environmental
impacts. Business respondents selected termination of relationships for non-compliance
with standards as the fifth most frequently used due diligence action in the upstream
supply chain, whereas general stakeholders selected working with local partners.
An interviewee who advises companies on their due diligence practices highlighted that
one of the common shortcomings of contractual clauses are that they are not being
monitored or implemented:196
We need a way to check, because the only thing now is that companies say: ‘Yes,
we have clauses’. But so far they haven’t been checking their implementation. We
are currently working on this, to encourage them to check and monitor.
Another interviewee who works with companies on their due diligence practices,
described the following common practices:
In terms of upstream, a range of different practices, social auditing is still
extremely popular and relied on. You might be familiar with Sedex as perhaps the
largest and most recognizable of the big brands.
Other companies have actually moved away from social auditing and have in-
country staff. Some big brands try not to use external auditors but rather send
company reps to factories to inspect individually and to both provide feedback
and to try and support their companies in proven practices.
A lot of our companies use private consultancies to guide their due diligence work
both in terms of the desk research, but also in-country, visiting workplaces,
conducting impact assessments, conducting risk analysis. That is also quite
common, and particularly with the larger corporations.
For the purposes of mapping risks in their supply chains, the interviewee described the
process which many companies use:
We know that a lot of companies engage in more salient risk mapping and
prioritization exercises to help them direct resources appropriately. A lot of them
use quite a rudimentary traffic-light system whereby they'll have a fairly basic
metric. Whereby there's a series of non-compliant [factors] that are considered
very serious. That might indicate that the supplier is given an orange or red light
196 See also McCorquodale et al above above n 143.
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and requires follow up, whereby the auditor checks why this has not raised any
serious concerns. They use that to rate individual suppliers to guide their work.
An interviewee from a financial institution described how due diligence works in the
banking sector:
As a bank we expect our clients to do due diligence as well. So the due diligence
that banks do is always sort of second tier due diligence. Our clients are primarily
responsible to work in their supply chains on their challenges. And we check
whether our clients are doing that in a good way. And we have an idea about
what standards in a sector should look like, but in the end it's our clients that
should actually do that. We may have clients that are really not interested in
human rights or have quite weak policies or procedures in place or do not have
adequate staff or capacity to do so. So for some clients [an EU level regulation on
due diligence in supply chains] may level the playing field, and our role as a
bank in checking whether our clients are up to speed may be eased by a
mandatory framework that applies to all clients.
Downstream value chain
For business and general respondents alike, contractual clauses and codes of conduct
were the most frequently selected actions in both upstream and downstream value
chains, followed by audits.
For the downstream value chain, the third most selected action by both business and
general survey respondents was working with human rights and environmental experts.
Business respondents followed this with training on human rights and environmental
impacts, engagement or leverage with other third parties (presumably downstream in
the value chain) and additional staff for human rights or environmental measures.
General stakeholders selected similar actions but in a slightly different order.
Regarding the downstream value chain, an interviewee from a multinational food and
drinks company indicated:
From a legislative perspective, I would say that the way the legislation should be
shaped, should most probably address first the upstream supply chain, if it has to
be differentiated, because this is where all businesses who decided to do
something began with, and this is also what, in my view, [aligns with] the
expectations of the civil society and the regulators.
Divestment was the least selected due diligence action by both business and general
respondents in both the upstream and downstream supply chain.
Case study: Lundbeck and Akorn: Restricting pentobarbital for lethal
injections in the US
An example of how a company can introduce changes to address their involvement in
human rights violations in their downstream supply chain are provided by the case study
of Lundbeck and Akorn.
Lundbeck, a Danish pharmaceutical company, manufactured pentobarbital under the
name of Nembutal, which is licensed for refractory forms of epilepsy and for usage as an
anaesthetic. The company was the only licensed supplier in the US in 2011. Early that
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year it was discovered that the US’ authorities had begun to use Lundbeck’s
pentobarbital for the purposes of lethal injections.197 Reprieve and Amnesty International
denounced the situation and appealed to Lundbeck to put an end to the use of the drug
in executions.198
In this context, if the company withdrew its drug from the market it could affect the
right to access to medicine, including for some which use the drug against life-
threatening epilepsy. On the other hand, if its product continued to be used for lethal
injections, the company risked being accomplice to violating the right to life.199
Facing this dilemma, Lundbeck showed in a letter its opposition of the use of Nembutal
for execution purposes and urged this use to be discontinued. Yet, it argued that the way
in which its product was used by licensed health care professionals was beyond the
company’s control.200 In June 2011, a group of clinicians published an open letter in The
Lancet (a respected medical journal) criticising the company and claimed that it “should
restrict the distribution of pentobarbital to legitimate users”, as it was doing with some
other of its neurological products in the US.201
On 1 July 2011, Lundbeck announced that Nembutal would be exclusively supplied
“through a specialty pharmacy drop ship program that will deny distribution of the
product to prisons…carrying out the death penalty by lethal injection”.202 In doing so, the
company guaranteed supplies of the product only to hospitals and therapeutic centres
for its indicated use,203 and it obliged purchasers to:”[S]ign a form stating that the
purchase of Nembutal is for its own use and that it will not redistribute any purchased
product without express written authorization from Lundbeck. By signing the form, the
purchaser agree[d] that the product will not be made available for use in capital
punishment”.204 This was a novel practice amongst pharmaceutical companies.205
In December 2011, Lundbeck sold Nembutal to Akorn.206 Lundbeck explained that its
decision was based upon economic considerations and was unrelated to the issue of
pentobarbital having been used in lethal injections.207 Currently, pentobarbital is
manufactured by Akorn and two other companies, and control systems seem to be in
place to prevent the drug from being used in lethal injections.208 In 2015, Akorn adopted
197 Karin Buhmann, "Damned If You Do, Damned If You Don’t? The Lundbeck Case of Pentobarbital, the Guiding Principles on Business and Human Rights, and Competing Human Rights Responsibilities" (2012) 40 The Journal of Law, Medicine & Ethics
206 at 206. 198 Reprieve, "Reprieve Calls on Danish Pharmaceutical Company Lundbeck to Take Decisive Action as Mississippi Becomes the
Fourth State to Seek Its Pentobarbital to Kill" (24 March 2011), available at:
https://reprieve.org.uk/press/2011_03_24mississippi_pentobarbital_lundbeck; Amnesty International USA "Denmark Company
Supplies Major U.S. Executioners" (30 March 2011), available at: https://www.amnestyusa.org/denmark-company-supplies-
major-u-s-executioners. 199 Buhmann above n 197 at 206. 200 "Letter Pentobarbital Manufacturer Sent to DOC’s about Using Pentobarbital for Executions" (26 January 2011), available at: https://deathpenaltyinfo.org/documents/LundbeckLethInj.pdf. 201 Ulf Wiinberg, "Open Letter to Ulf Wiinberg, Chief Executive of Lundbeck Pharmaceuticals – Response from Lundbeck" (2011)
377 The Lancet 2079. 202 Lundbeck "Lundbeck Overhauls Pentobarbital Distribution Program to Restrict Misuse" (1 July 2011), available at:
https://investor.lundbeck.com/news-releases/news-release-details/lundbeck-overhauls-pentobarbital-distribution-program-
restrict. 203 Reprieve, "Factsheet on Lundbeck’s Nembutal", available at: https://reprieve.org.uk/wp-
content/uploads/2014/10/2011_11_01_PUB_Lundbeck_distribution_system.pdf at 5. 204 Lundbeck above n 202. 205 Ty Alper, "The United States Execution Drug Shortage: A Consequence of Our Values" (2014) XXI The Brown Journal of World Affairs 27 at 31. 206 Akorn "Akorn Acquires Three Hospital-Based Branded Injectables from Lundbeck", 22 December 2011, available at:
http://investors.akorn.com/news-releases/news-release-details/akorn-acquires-three-hospital-based-branded-injectables-
lundbeck. 207 Anita M Halvorssen and Karin Buhmann, "Extraterritorial Regulation of Companies and the UN Guiding Principles on Human
Rights and Business" in Manoj Kumar Sinha (ed), Business and Human Rights, SAGE Law (2013) 152. 208 Lethal Information Center, "Controlled Medicines", available at: https://lethalinjectioninfo.org/controlled-medicines/.
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a policy to prohibit the direct sales of pentobarbital to prisons, and to restrict the sales to
a group of wholesalers who agree to keep the drug out of correctional institutions.209
According to Akorn, the availability of Nembutal to secondary customers or correctional
institutions is blocked either by agreement with the hospital customers known by Akorn,
or by contract with their distributors, which act as drop-shipping agents.210
Moreover, the Lethal Injection Information Center, an initiative of the NGO Reprieve,
publishes a list of controlled medicines for which distribution controls are in place to
ensure that products are being sold exclusively for legitimate medical use.211 This seems
to suggest that the attention which Lundbeck attracted incentivised the pharmaceutical
industry to take actions in their downstream supply chains for their negative human
rights impacts to be addressed.
The Lundbeck and Akorn examples demonstrate how companies can take actions to
address their human rights impacts in a tailored way, even in the downstream value
chain, which is notoriously hard to monitor. It is, however, noted that, in the absence of
legal requirements, these changes were predominantly driven by the pressure received
from civil society and clinicians.
In relation to downstream due diligence, the US Department of State recently issued a
Draft Guidance for the export of hardware and technology with surveillance capabilities
and/or parts/know-how.212 The guidance indicates that such items:
[C]an be misused to violate or abuse human rights when exported to government
end-users or private end-users that have close relationships with the
government. In some cases, governments have misused these items to subject
entire populations to arbitrary or unlawful surveillance, violating the right to
privacy as set out in the Universal Declaration of Human Rights (UDHR) and the
International Covenant on Civil and Political Rights (ICCPR).
In other cases, governments employ these items as part of a broader state
apparatus of oppression that violates human rights and fundamental freedoms
enumerated in the UDHR and ICCPR, including freedoms of expression, religion or
belief, association and peaceful assembly.
The misuse of an item can take many forms, including to stifle dissent; harass
human rights defenders; intimidate minority communities; discourage whistle-
blowers; chill free expression; target political opponents, journalists, and lawyers;
or interfere arbitrarily or unlawfully with privacy. Arbitrary or unlawful
interference with privacy is a particular concern in this context, especially since
such interference may also impede the enjoyment of other human rights, such as
the rights to freedom of expression, to hold opinions without interference, and to
freedom of association and peaceful assembly. These and other rights are among
the foundations of any democratic society.
209 Akorn, "Akorn Adopts Comprehensive Policy to Support the Use of Its Products to Promote Human Health", 4 March 2015,
available at: http://investors.akorn.com/news-releases/news-release-details/akorn-adopts-comprehensive-policy-support-use-its-products. 210 Dewey Steadman, "Taking a Stand to Promote Human Wellness" UKSIF Death Row Pharma webinar, 24 September 2015,
available at: http://uksif.org/wp-content/uploads/2015/10/UKSIF-Death-Row-Pharma-webinar-slides.pdf at 19. 211 "Controlled Medicines" above n 208. 212 U.S. Department of State, "Draft U.S. Government Guidance for Export of Hardware, Software and Technology with
Surveillance Capabilities and/or Parts/Know-How", available at: https://www.state.gov/wp-content/uploads/2019/09/DRAFT-
GUIDANCE-FOR-THE-EXPORT-OF-HARDWARE-SOFTWARE-AND-TECHNOLOGY-WITH-SURVEILLANCE-CAPABILITIES.pdf.
70
The guidelines seek to “provide insight to exporters on considerations to weigh prior to
exporting these items” and assist them with the implementation of the UNGPs and OECD
Guidelines for Multinational Enterprises.
Traceability and the scope of the supply chain 4.6
Due to the complex, dynamic and non-transparent nature of global supply chains,
traceability is a major challenge for companies aiming to undertake supply chain due
diligence. An interviewee from the European Confederation of Directors Institutes
(“EcoDa”), an organisation which represents 22 national institutes of directors in Europe,
indicated:
[I]n the real world most companies have a large amount of different supply
chains - in major multinational corporations often to be counted in hundreds -
many of them extremely complex, spanning over a variety of different sorts of
suppliers and subcontractors as well as across national and inter-continental
borders over the entire world.
This problem is aggravated by the use of complex corporate structures consisting of
various separate legal entities in different legal jurisdictions. These problems are
discussed further in the Problem Analysis and Regulatory Review section.
Beate Sjåfjell, who leads the SMART Project, explained these problems in an interview as
follows:
[C]orporate law in itself gives businesses a vast opportunity to fragment their
business across a number of legal entities through corporate groups. And then in
addition, with financial engineering, it is possible to have control of a company
without officially being a parent company. So the problem that is already there in
company law, that a parent company can control a subsidiary in another country
and get profits from that and not be responsible in most cases if something goes
wrong in that subsidiary or the community where the subsidiary is. That is then
even more exacerbated through the possibility, through financial engineering, of
control that is not visible from a company law perspective. That’s a second thing.
And then a third thing, which exacerbates this even further, is the shift from
corporate governance to governance through contract, so with the supply chains.
Where even if somebody in a business today wakes up and thinks: ‘Oh, I want to
have a sustainable supply chain’, then they would probably not even know what
their supply chain is. They might know the first level and the second. But this is a
huge problem.
A survey respondent from an industry organisation working in the cocoa sector describes
some of the common challenges which companies experience in their supply due
diligence, regarding complexity, and a lack of transparency:
Many commodities such as cocoa, are produced by millions of smallholder
farmers. Sourcing from hundreds, even thousands of different farmers, each of
them with their own characteristics and from different geographical areas, can
make the process of fully mapping the cocoa supply chain a challenging task,
even for sophisticated upstream companies. In addition, the cocoa supply chain is
complex, with many intermediaries involved. Such third parties may not have
enough visibility or knowledge on where the product is coming from or may not
be incentivized to share such information with upstream companies.
However, another interviewee from an environmental NGO argued that traceability is
less of a practical hurdle than is often thought:
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A lot of people talk about the problem that it's too difficult to trace the supply
chain. But from speaking to several companies, they've told me sort of privately
that this is just a bogus argument. Because they already trace their full supply
chain for food safety and for quality. So it is perfectly possible to do it. The
reason that they don't do it for deforestation and human rights issues is that it's
expensive to do in any case. And they're not going to put all that money unless
their competitors also have to do it as well. ... Often traceability is framed as a
technical problem, but according to what these companies told me it's technically
fully possible, it's just that it cost money. And no-one is going to send that money
on a voluntary basis if their competitors aren't going to do that as well.
One multinational garment sector interviewee indicated:
We do have a dedicated team which are just for traceability. They are textile
engineers so they have different systems to make sure that the factories that you
are declaring are actually the only factories that you are using…We [now] have
the technical expertise to analyse the capacity of the factories that the supplier is
declaring, making sure, crossing those figures with the number of garments that
they were supposed to be making in a specific period of time, and counting
actually the minutes that you spend per each garment, and then doing specific
audits to make sure that this production is actually being done there. Everything
becomes more and more sophisticated. So you can control, and you have your
supply chain is visible. And once you have all the cards on the table it’s easier to
understand.
The interviewee added:
We also have partnership with the ILO, in particular working with, because we
want to work beyond all the tiers that we have identified so far. So we have a PPP
with the ILO for cotton. So we want to go now to the cotton fields, which is
something that is unexplored for us. And the traceability, it’s a completely
different world.
Case study: Marks & Spencer and mapping supply chains
Marks & Spencer (M&S) is a British supermarket chain which retails both apparel and
agricultural products. M&S’s management of its supply chain provides a good example of
mapping a worldwide network of suppliers.
In a written evidence submitted to the Joint Committee on Human Rights of the British
Parliament during 2016, M&S highlighted the efforts which the company has taken to
communicate its commitment to human rights. It expressed its support for the
momentum created by the British Government via the UK National Action Plan on
Business and Human Rights, the UK Modern Slavery Act, the UK government’s funding
contribution for the Corporate Human Rights benchmark, the extended investigatory
remit of the Gangmasters Licensing Authority, and the creation of a new Labour Market
Enforcement Director.213 M&S also encouraged the UK Government “to continue its role
in influencing international governments” on human rights issues with similar
measures.214
213 Marks & Spencer, "Written Evidence from Marks & Spencer (HRB0013)" (July 2016) in UK Joint Committee on Human
Rights, Human Rights and Business 2017: Promoting responsibility and ensuring accountability, available at:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/human-rights-committee/human-rights-
and-business/written/34910.html. 214 Ibid.
72
In terms of M&S’s practices for due diligence, of particular interest is the company’s
interactive map of its sourcing locations.215 This map shows the type of product
manufactured and the address, as well as the male/female ratio, the exact number of
workers and whether trade unions or workers committees are in place. The map follows
M&S’s commitment to publish an annual list of their clothing manufacturers. The
factories appearing in the map are directly contracted by M&S direct suppliers “to
produce finished goods which are ready for retail and bear M&S brand logos and
marks”.216 The data contained in the map is sourced on self-declared information by the
suppliers and the database Supplier Ethical Data Exchange, which is then reviewed by
M&S Regional Office teams.217
However, the mapping only includes suppliers with which the company has a direct
relationship, and therefore excludes factories beyond the first tier of their supply
chain.218 The map also excludes small European meat and artisanal cheese suppliers219
Following pressure by the campaign “Who picked my tea?”, led by Traidcraft Exchange,
M&S added coffee and tea to its sourcing map in March 2019,220 and publicised it
through its blog.221
M&S was highest-ranked agricultural products company in the Corporate Human Rights
Benchmark in 2018,222 and second highest in 2019.223 It also topped a list ranking British
companies’ efforts in tackling modern slavery in 2018.224
M&S provides an example of a company which has been able to trace and publicise
details about its direct supply chain, including in sectors such as garment and agriculture
which are notorious for the complexity of supply chains. This transparency effort is
accompanied by an active communication policy, which fosters dialogue between
competitors and promotes accountability in their sector.
Case study: Hennes & Mauritz and transparency in the supply chain
Hennes & Mauritz (H&M) is a Swedish company manufacturing and distributing apparel
worldwide. Its case provides an innovative example of transparency along their supply
chain. On 23 April 2019, H&M announced that they will be providing information about
the supplier of every piece of garment, becoming the first major retailer to do so. This
effort enhances their novel approach of grading their suppliers, whereby each of its first-
tier suppliers are graded into platinum, gold, silver or other.225
H&M’s customers can now know where each clothing sold by the company was produced
215 Marks & Spencer, "Interactive Supply Chain Map", available at: https://interactivemap.marksandspencer.com/. 216 Ibid, "Find out more". 217 Ibid. 218 Ibid. 219 Ibid. 220 Amber Milne, "M&S Reveals Tea Suppliers to Address Worker Abuse Concerns" Thomson Reuters Foundation (5 March
2019), available at: http://news.trust.org/item/20190305192737-12tad/. 221 Hazel Culley, “A Transparent Cuppa – Mapping Our Tea and Coffee Supply Chains” Marks & Spencer, available at:
http://corporate.marksandspencer.com/stories/blog/a-transparent-cuppa-mapping-our-tea-and-coffee-supply-chains. 222 Corporate Human Rights Benchmark "View Banding Table" (2018), available at:
https://www.corporatebenchmark.org/home. 223 Corporate Human Rights Benchmark 2019, Key Findings Report, available at:
https://www.corporatebenchmark.org/sites/default/files/2019-11/CHRB2019KeyFindingsReport.pdf 224 Kieran Guilbert, "Marks & Spencer tops list of major British firms tackling modern slavery" Reuters (23 October 2018), available at: https://uk.reuters.com/article/britain-business-slavery-idUKL8N1X32M5. 225 Sarah Ditty, “Fashion Transparency Index 2019”, Fashion Revolution (2019) 53, available at:
https://issuu.com/fashionrevolution/docs/fashion_transparency_index_2019/1. H&M’s “gold” and “platinum” suppliers are the
company’s preferred and strategic partners. They profit from long-term relationships and are incentivised with joint capacity
planning. Suppliers graded with “silver” have close relationships oriented to the long term. Finally “other” suppliers are
producers which have been working with H&M for a period shorter than a year or that have been placed a test order. See, H&M
“Supplier List”, available at: https://sustainability.hm.com/en/sustainability/downloads-resources/resources/supplier-list.html.
73
by simply checking the website or phone app. This information is displayed next to each
garment, and includes the country of production, the supplier and factory names and
addresses, as well as the number workers in the factory. This step has been praised by
workers’ rights groups on the basis that the information available could be used by
human rights organisations to monitor companies’ supply chain and foster accountability.
Nevertheless, without further particulars about the human rights and environmental
conditions under which suppliers operate, information about the factual details of
suppliers may not be sufficient for customers to make informed choices. For this reason,
Anna Bryher of Labour Behind the Label suggested that the company could consider
“adding information… about wages paid at suppliers and comparing that to the living
wage benchmarks or their promises on living wages”.226
In any event, the new transparency policy of H&M is an example of how a company with
a complex supply chain can achieve traceability.
Audits 4.7
As indicated above, audits is one of the most frequently used steps in existing due
diligence processes, although various studies have underlined the shortcomings of audits
for the purposes of effective supply chain due diligence.
One interviewee indicated how auditing would commonly be used within the due
diligence process for a large supply chain:
We have 1800 direct suppliers, what everyone calls tiers one, because we do not
separate tiers…for us it’s the same. And then tier two to the end of the line, we
have around 7300 or 7400 per year. We train them, and the first thing that we do
is that when they introduce the factories in the system we go and audit the
factories before they can start working with us, to make sure that they comply
with our code of conduct which is based on international standards and human
rights. This audit, which is called the pre-assessment, is actually working as a
first filter, to make sure that only those factories that respect human rights can
be part of the supply chain. Then around that we have a number of [practices].
For example if our supplier introduces a number of factories and they do not pass
the pre-assessment because they do not comply with our code of conduct, then
we will work directly with the supplier to understand what is going on in their own
management systems regarding sustainability or regarding human rights. So we
will go and try to improve and understand why the supplier is failing in the
factories that they are giving us. So even if the factories go through and the
factories comply and they enter into our system, then they become part of this
never-ending wheel of different assessments, not only audits.
However, a number of interviewees also pointed out the limitations of audits. One
interviewee from a financial institution affirmed that:
We all know that auditing isn't working….If you do audits on your subcontractors,
we know that it's not working because it's announced, subcontractors feel
pressured. What helps is that if a big company is treating the subcontractors
differently, more as partners, teaching them, leaning into their problems, talking
to them, engaging with them.
226 Sonia Elks, “Fashion Giant H&M Lists Suppliers for All Garments to Tackle Worker Abuses” Thomson Reuters Foundation, 24
April 2019, available at: http://news.trust.org/item/20190424114703-zfxmp.
74
Another interviewee working for a civil society organisation indicated:
They [companies] commission an audit and they get the audit results and it’s
passed with a certain grade and that’s it. They do not make further queries or
question the quality or methodology of the audit. We of course often come across
labour rights issues in audited factories. It’s common knowledge that audits and
certification schemes have their own limitations and challenges.
One interviewee working within the government of a large Member State indicated:
There is apparently growing awareness that auditing systems often have
considerable flaws, especially when it comes to social and labour standards.
There is a growing feeling that in order to professionalise [due diligence]
approaches, we also have to find a way how to professionalise and also
streamline the global auditing systems.
One interviewee from civil society stated:
I feel like there are some companies that do this much more thoroughly and put
much more resources in it. But I would say the standard practice has been and
still is to do social auditing, to allegedly control the respect for their own codes of
conduct or their HR policy, which in my opinion is hugely problematic...
It’s a bold statement but I would say 90% of all social auditing reports are false.
They either write down lies or the report may not be deliberately lying but such
reports are not able to capture the reality of human rights violations on the
ground, already for methodological shortcomings.
An interviewee who works with businesses in the implementation of the UNGPs
explained:
We still do see companies stuck between audits, and the idea that many leading
companies know that they need to go beyond audit. But when it comes to the supply
chain and overwhelming numbers, they just don't know how to reconcile what audit
gives you, which is safety, and what the UNGPs and the focus on severe impacts is
telling you which is: ‘You're going to have to make some difficult choices if you really
want to go after to the very critical issues’. And that just makes them deeply
uncomfortable because they prefer things that are scalable. And inherently, when
you're talking about your own operations, I mean some business will have large
numbers of direct employees, they'll have large number of staff, but that's nothing in
comparison to the size of their supply chain. There is just this challenge of scale. And
a sense of: ‘We have to have a global approach for everything, and that's how we
reassure ourselves and our boards and the market though our disclosure that we
have this under control’. That is inherently in tension with saying ‘but how are you
going to devote meaningful resources to going after some of the most severe
issues?’. And I think that they are still stuck in that paradigm.
Leverage and the ability of individual companies 4.8
Survey respondents and interviewees made frequent reference to the concept of
leverage, which is a key concept introduced by the UNGPs in relation to the exercise of
due diligence.
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The UNGPs state that companies should exercise leverage to mitigate any adverse
human rights impacts that it may be contributing to. Leverage is defined as “the ability
to effect change in the wrongful practices of an entity that causes a harm”.227 Where a
company has leverage, it should exercise it, and where it lacks leverage, it should make
efforts to increase its leverage, including through “capacity-building or other
incentives”.228
In addition, the UNGPs are clear that divestment or termination of business relationships
should not be the first reaction when an adverse human rights impact is identified.
Instead, a company should carefully consider the human rights impacts of terminating
such a relationship:229
There are situations in which the enterprise lacks the leverage to prevent or
mitigate adverse impacts and is unable to increase its leverage. Here, the
enterprise should consider ending the relationship, taking into account credible
assessments of potential adverse human rights impacts of doing so…
In any case, for as long as the abuse continues and the enterprise remains in the
relationship, it should be able to demonstrate its own ongoing efforts to mitigate
the impact and be prepared to accept any consequences – reputational, financial
or legal – of the continuing connection.
`
This approach was also reflected in the survey responses, insofar as divestment was the
least selected due diligence action by both business and general respondents in both the
upstream and downstream supply chain.
One interviewee from a financial institution stated that:
Many of the NGOs that we talk to often say that we should disengage and end a
relationship. It's actually much more interesting to engage with, in our case,
clients, in the case of many companies, suppliers, and together identify root
causes, what is going on, and work on improvements.
An interviewee from a large multinational corporation indicated:
When you have found out that there are some issues, for instance in terms of
labour rights or other issues, very often procurement people … don't want to take
any risk and they just want to end the contract. It is not necessarily the right
thing to do from an ethical point of view, because very often it could put the
workers in a worst situation. So we are working, on a case-by-case mode [...] on
remediation action plans to see if they have the capacity and the will to improve
in order to avoid if possible immediate termination that would put the workers in
a very bad situation.
The importance of continuous engagement for leverage with suppliers was confirmed in
interviews. One interviewee from a multinational garment company indicated:
It’s been 18 years [that we have been developing our due diligence]. We have a
dedicated team of 80 people, and a lot of support from the company. It’s been
and it still is an extremely long process. We have to keep up with the risks of the
supply chain. Having people on the ground in those places where we are
producing is crucial. Having good relationships with the first tier suppliers, and
making them understand how the responsibility is a shared responsibility. And
227 Commentary to UNGP 19. 228 Ibid. 229 Ibid.
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providing them with the tools, because we are bigger than them and we just have
more resources. So we have been making their lives as easy as possible in
providing them the tools, the knowledge, the expertise that they need, to make
sure that they took care of their own supply chain, with the final responsibility
being ours.
An interviewee working within the government of a large Member State indicated:
For sure, engagement for suppliers only holds true for tier 1. There is an
understanding that tier 1 engagement is adequate, doable, however effective
engagement with suppliers beyond tier 1 is pretty impossible. Companies report
impossibility to engage with tier 2 or tier 3 because of the lack of transparency of
supply chains. Large companies say it would be very helpful if there were better
rules on supply chain transparency, which would allow a company not only to ask
suppliers to be transparent of tier 2 or 3, but that they actually would have a
legal entitlement to get this information for the sake of [due diligence].
However, companies operate in and source from host states where there are often
systemic issues affecting the operating context. Survey respondents and interviewees
emphasized that any legal standard should take into account that there is often only so
much a single company can achieve through its own leverage when facing a systemic
challenge. A survey respondent from an industry organisation indicated:
[T]he burden of a commitment of results should not be, considering the role and
shared responsibilities of (local) authorities, solely on business' shoulders.
A survey respondent from a large industry organisation indicated in optional text boxes
that some of the biggest challenges their company members face in exercising due
diligence include a lack of leverage:
Some suppliers are much ‘bigger’ than their customers, even if those are
multinational companies. Suppliers may refuse to cooperate, to respond to
investigations or audit requests. In these cases, customers try to exercise
leverage by dialogue and cross-sector initiatives, but it must be underlined that
even large companies do not necessarily have leverage on their larger suppliers
operating in third countries, which are not as concerned as themselves about
reducing negative impacts.
Some suppliers are in a situation of monopoly and refuse to change their
practices. They know that their customers will still need to buy their products.
This was confirmed by a garment sector interviewee, who indicated that in cases where
they are not the only customer of a specific factory, their leverage is often limited:
Our approach is: let’s create tools for the workers to understand and to fight for
their own rights, because there is only so much that we can do to change the
factory from the outside. Sometimes we are just one of the customers.
Another interviewee from an international trade association which advises companies on
their due diligence explained that the inaction of others in the industry hampers the
effectiveness of others’ due diligence efforts:
A lot of the due diligence we are witnessing is not really effective. It doesn't
generate the data required to genuinely measure effectiveness for one thing, so it
is very difficult to measure concrete impact. In terms of the cause or correlation
of a company taking a specific step and engaging in a project…if there's a change
77
on the ground. [M]ost companies [are] simply unable to determine whether there
was a direct cause or correlation to change using working conditions.
In that sense, [due diligence] is falling far short on the other side, as the working
conditions in global supply chains on the whole remain very poor. We know that
wages are still extremely low in sourcing destinations. Even in tier one factories in
Bangladesh, where [brands have] their direct commercial leverage and a
commercial relationship and a contract, wages [are] still very low [and]
conditions still very poor.
That demonstrates the due diligence work is ineffective. Because some brands
are taking this seriously. They are dedicating resources. They have a very
talented pool of individuals experienced, passionate staff who are working on
issues. And yet they can't affect change because of the wider externalities and
conditions and issues in sourcing countries.
As will be seen below, some interviewees argued that mandatory due diligence
regulation that applies across the board to all companies is likely to alleviate the
pressure that is currently placed on individual companies, through improving corporate
practices as a whole, and consequently, conditions on the ground.
Case study: Fairphone and transparency in communications
Fairphone is an Amsterdam-based social enterprise.230 It started in 2010 as a campaign
to raise awareness about conflict minerals in consumer electronics, and in 2013 was
officially established as a smartphone company. To date, Fairphone has produced two
smartphone models. Since the very beginning, the company attracted the attention of
the media for their novel aim: to create a conflict mineral-free phone.231
Fairphone has shown an unusually communicative approach in the sourcing and
manufacturing of their smartphones. The company has not only engaged in dialogue
with their current and potential customers, but also with their competitors. Indeed,
Fairphone views their products as a means to communicate: “[I]t is a vehicle for
engaging stakeholders to spread a message of responsibility on the part of both
producers and users, across four areas: mining, design, manufacturing and lifecycle”.232
Fairphone has published the details of the cost of production of their two smartphone
models,233 a source map of their second terminal, 234 and an explanation of the main
minerals in their smartphones and details of their global mined production.235 This
exercise of transparency is aimed at raising public awareness amongst consumers and
competitors.
Fairphone has also engaged in communication with NGO stakeholders. A report by
230 Fairphone BV, registration number KvK: 55901964. 231 Rich McEachran, "Could Fairphone Help Clean up Supply Chains in the Smartphone Market?" The Guardian (19 September
2013). available at: https://www.theguardian.com/sustainable-business/fairphone-supply-chain-smartphone-market. 232 Sam Phipps, "Case Study: How Fairphone Is Blazing a Trail to a Smarter Phone Industry" Ethical Corporation, (22 April
2016), available at: http://www.ethicalcorp.com/case-study-how-fairphone-blazing-trail-smarter-phone-industry. 233 Fairphone, "Cost Breakdown of the First Fairphone" (September 2013), available at: https://www.fairphone.com/wp-
content/uploads/2013/09/Fairphone_Cost_Breakdown_and_Key_Sept2013.pdf; Fairphone, "Cost Breakdown of the Fairphone
2" (2015), available at: https://www.fairphone.com/wp-content/uploads/2015/09/Fairphone2-Cost-Breakdown.pdf. 234 Fairphone, "Fairphone 2 Supply Chain" Sourcemap, available at:
https://open.sourcemap.com/maps/57d016b346a1127f1ceff50c. 235 Fairphone, "Smartphone Material Profiles" (2017), available at: https://www.fairphone.com/wp-
content/uploads/2017/05/SmartphoneMaterialProfiles_May2017.pdf.
78
SOMO, Südwind, and the Good Electronics Network pointed out that certain aspects had
not been sufficiently addressed by the company.236 In response, Fairphone published an
article on its website aimed at addressing the issues mentioned in the report.237
Fairphone similarly has a novel approach to engagement with their own customers,
insofar as the company has actively communicated about its emerging problems in its
supply chain. For instance, when the production of their terminals was delayed in
December 2015 due to a high volume of Christmas orders, the company issued a public
statement explaining to their customers the reasons for the delay, which were to avoid
supply chain workers working excessive hours.238 In its communication, the company
explained the implications of production requirements on the workforce.239 The company
has been hailed as meeting “their customer requirements by openly communicating
sustainability achievements as well as shortcomings and how they deal with them”.240
Commentators have also noted that Fairphone’s practices provide an example of how a
transparent communication strategy can improve standards in a sector. If a company
raises its standards, other business may “follow by raising their standards too due to
competition reasons… in order to be able to sell their products on the market, or due to
normative reasons”.241
Despite this, Fairphone has not been exempt from criticism. Issues have been raised
regarding the misuse of the word “fair”, the impossibility of fair and sustainable
production in trade union-free China – where the company’s terminals are assembled –
and the small size of Fairphone’s actual impact.242
Yet, the company has been put forward by Oxfam as an example of a more “equitably
structured business” which is “governed to prioritise a social mission”,243 and an
innovative electronics company “building their brand appeal on the basis of fair work
conditions”.244 The above report by SOMO et al states that Fairphone standards scored
higher than those of the sustainability certification awarded to IT products by the
Swedish company TCO Development.245
Fairphone provides an interesting example through the way in which the company has
communicated its actions in an unprecedented way, and how a small company can aim
to raise standards and awareness amongst their very large competitors.
Communication with stakeholders and local experts 4.9
236 The “aspects not sufficiently addressed by Fairphone” were: (i) the improvement of recyclability through the design; (ii) the
promotion of responsible use of chemicals during production; (iii) no mention of an environmental management system; (iv)
no effective grievance mechanisms at the factory level; and (v) no mention of responsible taxation. See SOMO, Südwind and
GoodElectronics Network, "TCO Certified Smartphones versus Fairphone. A Comparison of Sustainability Criteria" (2015),
available at: https://www.somo.nl/wp-content/uploads/2015/07/TCO-Certified-Smartphones-versus-Fairphone.pdf at 38. 237 Fairphone, “Comparing Fairphone’s Approach to a Sustainability Label” (23 July 2015), available at: https://www.fairphone.com/en/2015/07/23/comparing-fairphones-approach-to-a-sustainability-label/. 238 Fairphone, "December Production Update: How Production, Workforce and Delivery Are Intertwined" (3 December 2015),
available at: https://www.fairphone.com/en/2015/12/03/december-production-update-how-production-workforce-and-
delivery-are-intertwined/. 239 Ibid. 240 Carolin Brix-Asala et al "Sustainability Tensions in Supply Chains: A Case Study of Paradoxes and Their Management"
(2018) 10 Sustainability 424 at 13. 241 Sarah Van Eynde and Kris Bachus, "Non-State Participation in Sustainable Materials Management: The Case of Fairphone"
Policy Research Centre on Sustainable Materials Management (2016), available at: https://lirias.kuleuven.be/1864104 at 4. 242 SOMO, Südwind and GoodElectronics Network above n 236 at 30. 243 Oxfam et al, "Reward Work, Not Wealth: To End the Inequality Crisis, We Must Build an Economy for Ordinary Working
People, Not the Rich and Powerful" (2018), available at: https://www-cdn.oxfam.org/s3fs-public/file_attachments/bp-reward-
work-not-wealth-220118-en.pdf at 53. 244 Earth Security Group, "The Earth Security Report 2017: Sustainable Development Goals for Business Diplomacy and
Growth" (2017), available at: http://www.indiaenvironmentportal.org.in/files/file/The-Earth-Security-Report-2017.pdf at 48. 245 SOMO, Südwind and GoodElectronics Network above n 236. See also TCO Development website at:
https://tcocertified.com/.
79
As discussed in the Regulatory Review, the concept of due diligence as derived from the
UNGPs into other standards such as the OECD Guidelines requires the company to “go
beyond” the risks to the company to focus on the risks to those affected (the “rights-
holders”).246 A survey respondent from a large cross-sectoral industry organisation
emphasized in an optional text box that this requires a change in the traditional way in
which companies have approached due diligence:
Several [of our] members have strived to identify best practices and key factors
for success in deploying due diligence processes in their own operations and
through supply chains. Among these key factors are … Changing the point of
view: the targeted risks are not those for the company, but risks to society and to
the environment.
They added that:
Reporting adopted diligence measures is more than “top down communication”
and disclosing regulated information. It is also about engaging with stakeholders
and responding to their concerns … Adjusting the content and form of
communication so that it is accessible, understandable and relevant for its
recipients … Providing information which allows stakeholders to assess the way
the company considers the impacts of its activities, the way it selects the
information that is disclosed and the challenges and lessons learnt etc.
In one example of a partnership with stakeholders and local experts, an interviewee
from a multinational garment company indicated:
We have a global framework agreement with IndustriAll global union, with the
trade unions. And we do work with the trade unions on a daily, daily, and I really
mean it, daily basis, on the ground. We’ll go to factories with them. We will travel
with them to specific factories because something is going on, or we will travel to
a specific region to put together their understanding of what workers need, to
understand which type of project could improve not only factory by factory but
also the region. Our work with trade unions for the last 11 years has been and
still is very interesting for everyone. It’s also challenging because we work with
IndustriAll on a global level, but then we also work with local trade unions, and
each country has its own local reality, even the maturity of the trade unions is
completely different.
Case study: Nestlé and NGO partnering
Nestlé, domiciled in Switzerland, is one of the largest food and beverage companies in
the world, with an extensive supply chain. This case study provides an illustrative
example on how partnering with a human rights organisation may assist a company to
prevent and address human rights impacts along their supply chain.
Since 2010, Nestlé has been collaborating with the Danish Institute for Human Rights
(“DIHR”) under an innovative partnership aimed at integrating human rights into
Nestlé’s policies and procedures.247 As a product of this alliance, Nestlé has developed
and implemented a Human Rights Due Diligence Programme based on eight pillars, in
which human rights impact assessments (“HRIAs”) have been central. Under this
partnership, the DIHR has conducted research on parts of Nestlé’s supply chain. For
example, in 2013 both the DIHR and Nestlé published a report presenting the
246 Commentary to UNGP 17. 247 Danish Institute for Human Rights (“DIHR”) "Nestlé Partnership", available at:
https://www.humanrights.dk/projects/nestle-partnership.
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methodology and findings of seven human rights impact assessments conducted in
country operations of Nestlé.248 In April 2014, this report was followed by a roundtable
facilitated by the DIHR, with around twenty experts on human rights and development
from consultancy firms, think thanks, international organisations and NGOs.249 This
multi-stakeholder engagement is a novel approach to managing due diligence in the
supply chain.
In a report in 2016 Nestlé’s practices in its supply chain were considered as “notable
examples” on traceability, cascading standards through the supply chain, and workers
voice.250
More recently, in 2018, the DIHR and The Forest Trust published an assessment of
labour’s rights in Nestlé’s palm oil supply chain in Indonesia.251 This report assessed the
company’s direct and indirect suppliers to identify and describe actual and potential
human rights risks and impacts, with a particular focus on labour rights. As a result,
both Nestlé and Golden Agri-Resources – Nestlé’s main oil palm supplier in Indonesia –
developed and published plans to address the conclusions of the assessment.252
In December 2018 Nestlé announced an improved version of its human rights training to
commemorate the 70th Anniversary of the Universal Declaration of Human Rights,253 and
in April 2019, the company made its human rights training publicly accessible, becoming
the first company to do so.254
Nevertheless, this engagement towards a human rights-compliant supply chain does not
seem to have prevented lawsuits from being filed against Nestlé.255 This raises questions
on the counter-effects of a company’s public engagement in due diligence in its supply
chain. It has been suggested that companies may fear that the more they publish, the
more they will be exposing themselves to be possible legal claims, thereby creating a
legal incentive not to publish nor engage in due diligence.256 As Nestlé representatives
have stated in response to claims filed against the company, “in bringing such lawsuits,
248 DIHR and Nestlé, "Talking the Human Rights Walk" Nestlé’s Experience Assessing Human Rights Impacts in Its Business
Activities" (2013), available at: http://www.nestle.com/asset-
library/documents/library/documents/corporate_social_responsibility/nestle-hria-white-paper.pdf. 249 SustainAbility, "Nestlé Human Rights and Rural Development Roundtable London: Summary of Stakeholder Feedback"
(2014), available at: https://www.humanrights.dk/sites/humanrights.dk/files/media/dokumenter/business/nestle-human-
rights-rural-development-stakeholder-summary.pdf. 250 Know the Chain, "Food & Beverage Benchmark Findings Report: How Are 20 of the Largest Companies Addressing Forced Labor in Their Supply Chains?" (2016), available at: https://ktcdevlab2.wpengine.com/wp-content/plugins/ktc-
benchmark/app/public/images/benchmark_reports/KTC_Food_Beverage_Findings_Report_October.pdf at 12, 14 and 16. 251 Dirk Hoffmann, Tulika Bansal and Janhavi Naidu, "Labour Rights Assessment: Nestlé’s Palm Oil Supply Chain in Indonesia"
DIHR and The Forest Trust (2018), available at:
https://www.humanrights.dk/sites/humanrights.dk/files/media/dokumenter/udgivelser/hrb_2018/nestle-
rapport_hria_2018.pdf. 252 Nestlé, "Nestlé Action Plan on Labour Rights in Palm Oil Supply Chains" (2018), available at: https://www.nestle.com/asset-
library/documents/creating-shared-value/responsible-sourcing/palm-oil-action-plan-2018.pdf; Golden Agri-Resources, "GAR
Supplier Support Action Plan: GSEP Principle 3 – Work Environment and Industrial Relations" (2018), available at: https://goldenagri.com.sg/wp-content/uploads/2017/06/Action-Plan-HRIA-V8clean.pdf. 253 Yann Wyss, "Building Human Rights Capabilities Where It Matters", Nestlé, available at:
https://www.nestle.com/stories/building-human-rights-capabilities. 254 DIHR, "Nestlé First Company to Publicly Share Its Human Rights Training for Employees", available at:
https://www.humanrights.dk/news/nestle-first-company-publicly-share-its-human-rights-training-employees. 255 For instance, see BHRRC "Nestlé, Cargill, Archer Daniels Midland Lawsuit (Re Côte d’Ivoire)", available at:
https://www.business-humanrights.org/en/nestl%C3%A9-cargill-archer-daniels-midland-lawsuit-re-c%C3%B4te-divoire.
BHRRC, "Nestlé Lawsuit (Re Forced Labour in Thai Fishing Industry)", available at: https://www.business-
humanrights.org/en/nestl%C3%A9-lawsuit-re-forced-labour-in-thai-fishing-industry; Nick Brown, "Court Dismisses Cocoa
Supply Chain Labor Non-Disclosure Suit Against Nestlé", Daily Coffee News by Roast Magazine (12 March 2019), available at: https://dailycoffeenews.com/2019/03/12/court-dismisses-cocoa-supply-chain-labor-non-disclosure-suit-against-nestle/; and
Emily Field, "‘Sustainable” Nestle Cocoa Made With Child Slavery, Suit Says", Law 360 (24 April 2019), available at:
https://www.business-humanrights.org/en/usa-class-action-lawsuit-filed-against-nestle-for-child-slavery-on-cocoa-harvest-in-
west-african-farms. 256 For example, see Peter Nestor and Jonathan Drimmer “How Companies Should Respond to the Vedanta Ruling”, BSR, 30
April 2019, available at: https://www.bsr.org/en/our-insights/blog-view/how-companies-should-respond-to-the-vedanta-
ruling.
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the plaintiffs' class action lawyers are targeting the very organisations trying to fight
forced labor”.257
In any event, Nestlé represents an excellent example of how meaningful and ongoing
stakeholder dialogue, engagement with human rights experts and local partners, and
reporting can contribute to effective due diligence in supply chains.
Case study: Huayou Cobalt: Acknowledging risks in artisanal and small-scale mining
Huayou Cobalt is a Chinese company. It is one of the world’s largest manufacturers of
cobalt products. In the Democratic Republic of the Congo (“DRC”), it operates with its
wholly owned subsidiary Congo Dongfang International Mining SARL (“CDM”). For the
purposes of this case study, Huayou and CDM will be considered as one company.
In a report published in 2016, Amnesty International traced cobalt from artisanal mines
throughout the supply chain. It found that CDM was one of the largest companies in the
DRC buying cobalt ores from licensed trading houses, which were in turn purchasing
cobalt mineral from artisan miners.258
The DRC holds nearly half of the world’s cobalt resources and concentrates more than
half of the world’s mined production.259 Cobalt is an essential mineral for the production
of electrical batteries, which in turn is increasingly being relied on in the shift to more
sustainable energy. As such, this case study is particularly relevant to this study in light
of the EU’s commitments to achieving net-zero greenhouse gas emissions.260
Most of the cobalt extraction of it in the DRC is made by artisanal and small scale
mining, a sector with high risks of child labour and other human rights abuses. In
particular, Amnesty International highlighted in its report that most of the miners
worked for very long hours in unsupported hand-dug tunnels without the most basic of
protective equipment.261 As a consequence, the workers faced high risk of long-term
health damage and fatal accidents. Young children worked for up to twelve hours a day
“scaven[ging] for rocks containing cobalt in the discarded by-products of industrial
mines, before washing and sorting the ore to sell”.262
Following the publication of the report, Huayou acknowledged in a letter to Amnesty
International that it previously had a deficit in the awareness of human rights risks and
abuses along its supply chain.263 Since then, the company started taking steps to
improve the international human rights standards in its supply chain.264 Huayou sent
representatives to consult with experts at the OECD, undertook a fact-finding exercise in
the DRC, met with DRC government mining authorities and visited the same artisanal
mining sites that Amnesty International reported.265 In particular, Huayou did not
257 Field above n 255. 258 Amnesty International, "‘This Is What We Die for': Human Rights Abuses in the Democratic Republic of the Congo Power the
Global Trade in Cobalt" (2016), available at: https://www.amnesty.org/download/Documents/AFR6231832016ENGLISH.PDF at
47. 259 Fairphone, "Smartphone Material Profiles" above n 235 at 8. 260 For example, see Communication from the Commission to the European Parliament, the European Council, the Council, the
European Economic and Social Committee, the Committee of the Regions and the European Investment Bank “A Clean Planet
for all: A European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy”,
COM(2018) 773, 28 November 2018, available at:
https://ec.europa.eu/clima/sites/clima/files/docs/pages/com_2018_733_en.pdf. 261 Amnesty International above n 258. 262 Ibid at 4. 263 Amnesty International, "Time to Recharge: Corporate Action and Inaction to Tackle Abuses in the Cobalt Supply Chain"
(2017), available at: https://www.amnesty.org/download/Documents/AFR6273952017ENGLISH.PDF at 38. 264 Bryce Lee, "Sustainable Supply of Li-Ion New Battery Materials" Cobalt Institute (CI) Conference 2018, Las Vegas (24 May
2018), available at: http://www.huayou.com/downloadRepository/5af6fe72-d1ab-4296-9dd0-07d275640250.pdf at 10. 265 Amnesty International above n 263 at 38.
82
terminate its relationships with its suppliers sourcing from artisanal and small scale
mines.266 In acknowledging that abandoning the artisanal and small scale miners would
create a negative impact in the communities which subsist from these practices, the
company put in place due diligence policies along its supply chain.
Since 2017, Huayou requires its suppliers to sign three documents which are in line with
the OECD guidance: a Due Diligence Policy for a Responsible Global Supply Chain of
Cobalt,267 a Suppliers’ Code of Conduct,268 and a Supplier Standard for Responsible
Sourcing of Cobalt.269 According to its new due diligence scheme, Huayou will stop
buying cobalt from suppliers which do not know the source of the cobalt sourced from
artisanal small scale miners, do not have strong controls of risks in place, or do not have
a proper tracking system.270 Moreover, Huayou put in place a strategy to map and
mitigate risks in its supply chains by differentiating between “Type 1 mines”, being
former industrial mines turned into artisanal cooperatives, and “Type 2 mines”, which
are mines located within residential areas.
In 2017, Amnesty International published a follow-up report in which it assessed the
supply chain due diligence schemes put in place by Huayou in the DRC.271 Amnesty
International acknowledged that: “Since January 2016, Huayou Cobalt has taken steps
to establish a cobalt supply chain due diligence policy and management system in line
with international standards [e.g. OECD Guidance and CCCMC Guidelines] to investigate
and map its supply chain and to start to mitigate risks associated with artisanal
mining”.272
Nevertheless, Amnesty International also noted that: “much more concrete detail is
needed about potential and actual risks the company has identified in the DRC, as well
as results of Huayou Cobalt’s risk assessment activity… Without this information, it is
difficult to assess the quality and effectiveness of Huayou Cobalt’s risk assessment and
mitigation work.”273
In response to the report, Huayou stated that: “In the absence of legal or generally
acknowledged due diligence guidelines and clear requirements regarding due diligence
information reporting, and when other companies are not subject to the same scrutiny
as Huayou, we believe that it will create an unfair business environment if Huayou
unilaterally makes detailed due diligence investigation public. Even so, Huayou is
currently the most transparent business in the industry.”274 Further, Huayou also
declared that “its efforts to exercise leverage over its suppliers have been weakened by
the presence of other large buyers who do not face the same pressure to undertake
supply chain due diligence because they have not been publicly identified as having
supply chain risks”.275
Huayou’s case study shows a very strong engagement with Amnesty International in an
attempt to set up and improve due diligence practices along its upstream supply chain.
This case study suggests that supply chain due diligence can be carried out, even in
sectors where human rights risks are very high. It also shows that companies which
266 Ibid. 267 Huayou Cobalt, "Due Diligence Policy for a Responsible Global Supply Chain of Cobalt", available at:
http://en.huayou.com/downloadRepository/8adb91b3-b766-453c-97eb-e9f388b7d814.pdf. 268 Huayou Cobalt, "Suppliers’ Code of Conduct", available at: http://en.huayou.com/downloadRepository/e6cefb0e-c623-
4a9a-a29e-3ed3e6a89c96.pdf. 269 Huayou Cobalt, "Supplier Standard for Responsible Sourcing of Cobalt", available at:
http://en.huayou.com/downloadRepository/49407ec9-ca3a-43ee-8b88-2cec3bea0850.pdf. 270 Bryce Lee, "Huayou Cobalt’s Due Diligence and Audit of Responsible Cobalt Supply Chain" (9 August 2017), available at:
http://en.huayou.com/downloadRepository/ce6d255e-2a81-4718-bd51-7f6f85f0ed5d.pdf at 25. 271 Amnesty International above n 263. 272 Ibid at 44–45. 273 Ibid at 45. 274 Ibid. 275 Ibid at 40.
83
have been identified by civil society as adversely affecting human rights in their supply
chains, can take proactive steps to improve to the point that they might be seen as the
leaders in their sector by those same civil society organisations.
This case study also provides a concrete example of a company which has publicly
explained that its due diligence efforts are less effective if other large buyers, which
source from the same suppliers, are not adhering to the same standard.
Buying practices and an integrated approach 4.10
Many stakeholders in the interviews and surveys highlighted that buying practices,
including price, are a major contributor to adverse impacts in the supply chain, and
accordingly need to be considered as part of a due diligence standard.
The Joint Ethical Trading Initiatives (ETI) have issued a guide on how to buy responsibly
which aims to develop and implement responsible purchasing practices. The guide
presents and builds on findings of a survey of almost 1,500 suppliers to UK, Denmark
and Norway-based companies across multiple sectors.276 The survey found that “[w]hile
many companies require suppliers to respect their codes of conduct (CoC) and monitor
suppliers’ labour rights performance, their buying practices often sit at odds with these
initiatives.”277 While 93% of surveyed suppliers indicated that they are required to follow
codes of conduct, “many customers do not provide sufficient support to help [suppliers]
meet these requirements of their code of conduct”, with 48% of suppliers receiving “no
help at all”.278
An interviewee from an international civil society organisation explained this issue as
follows:
[W]e’ve noticed…sometimes companies, if they do human rights due diligence,
then they would just say to their suppliers: ‘Oh, you have to sign this code of
conduct. You cannot use children, you cannot do this, you cannot do that.’ But
they still have the same trading conditions. The same price, the same delivery
time and so on. So it really pushes the pressure on the supplier without the buyer
having to do anything about it ... Especially if it’s small producers, small
cooperatives, or small companies. They really struggle. They have increased
pressure. They need to produce in a sustainable way, which is a good thing, but if
they don’t get paid enough, it’s very difficult for them…
One interviewee from a multinational corporation which organizes workshops on their
due diligence practices and carry out a number of interviews, including with their
suppliers, indicated:
[I]t was so interesting to talk to suppliers who shared their dilemmas. You know,
they are put under pressure by us on quality, service level, on price, on timing,
on speed, and at the same time we expect them to make sure that their own
suppliers are supervised. And they say: ‘Great, where is the support from [your
company]?’ Then you really get to understand the local context, which is very
powerful. And then that information you bring into the workshop [...] It's so
276 The Joint Ethical Trading Initiatives (“ETI“), ”Guide to buying responsibly” (2018), available at:
https://www.ethicaltrade.org/resources/guide-to-buying-responsibly, for which the authors interviewed over 1500 suppliers
about buying practices including price. 277 Ibid at 7. 278 Ibid.
84
powerful because it opens people's eyes. The personal engagement and taking
the time is quite powerful.
Another interviewee who works with businesses in the implementation of the UNGPs
highlighted how purchasing practices can contradict a company’s supply chain standards
due to a lack of internal integration between the functions of the company:
Where we often see the process getting a bit stuck is at the step immediately
after assessment which is integration, taking action as we call it in the [UN]GPs
or the ‘so what?’. You go through your identification exercise, you also go through
prioritisation, as that's something that the [UN]GPs allow for, and is necessary
often for companies with huge numbers of risks and impacts to make their
choices. But then really moving into parts of business practice that are going to
be most meaningful in terms of really responding to those risks. I'm talking here
here things like purchasing practices … It's not about having one-off ad hoc
initiatives, it's not about increasing your audit programs. It's about tackling the
parts of the business where decisions are being made or have been made for a
long time on a different set of criteria, and where you have potentially conflicting
incentives internally. So you have your human rights, or they may be framed
more broadly as sustainability commitments, and then, on the other hand, you
have purchasing teams who have been given very clear instructions that they
have to prioritize price, and quality and timeliness. And until these things are
really brought together by the business, you're almost asking staff to do
something impossible. You're asking them to sort of put one set of values over
business priorities, and it's not fair to put that on operational staff. These are
decisions that are integral to the business model really, and to whether a
business accepts that there may be some real costs of taking meaningful
measures of the kind that the UNGPs and human rights due diligence are asking
for.
The interviewee went on to add that there is a risk if regulation focuses too much on
“public-facing” parts, such as reporting and transparency:
[If] legislation focuses too much on the public-facing parts of due diligence, if it's
legislation that doesn't really give guidance about ‘this means risks to people, and
it means getting into difficult parts of the business like purchasing practices’, if it
doesn't incentivize the right kinds of behaviour change by business.
One interviewee who works with companies on their due diligence practices also referred
to other initiatives such as:
Better Buying and a number of other self-assessment tools where big brands
allow suppliers to rate their purchasing practices, which feeds into their due
diligence work. It supplies and provides brands with an honest assessment of
whether their payment terms are for example, are undermining labour rights…[It]
is really promising because it allows suppliers to provide anonymous feedback so
brands don't know who submitted the feedback form. Brands only receive the
reply when suppliers provide feedback, and it holds a bit of a mirror upward in
terms of knowing what practices suppliers value and what [they don’t like].
With regard to integrated buying practices, one interviewee from a multinational
company indicated:
We create teams within our teams so that they could focus on creating global
solutions for these rights, instead of always going factory by factory case by case
and always having a reactive approach to the impacts.
85
One interviewee from a civil society organisation explained how buying practices,
including price, could by tied with the legal standard of care of mandatory due diligence,
including a due diligence defence:
We are really supportive of [a mandatory due diligence law], but we want to
make sure that it is done in a way that does not just put the pressure on the
suppliers, but ensures that everyone along the chain takes their responsibility.
And for us, really, the responsibility of the buying company is the way they buy.
It’s not to go and build a school in Africa so that there is no child labour. It’s not
to go and send auditors every year or every month to check that there are no
children working on the farms. It’s really the way they buy and how much they
pay.
If a company pays a good price, then it’s up to the supplier to respect human
rights. Now, if they still violate human rights, or if they still, I don’t know, don’t
pay minimum wages even though the price they get is sufficient, then it’s not
really the fault of the company. But if companies pay a really low price, then, I
mean, they can’t say: ‘Oh, we didn’t know’. They didn’t give the means for the
supplier to actually respect human rights. Now I know it is easier said than done,
because it’s really difficult, and you touch on the price, and we can’t define the
price in a law. How are they going to calculate the costs of production? That is
actually why the Fairtrade model is quite interesting, because, it’s not perfect, but
[it calculates] a minimum price which would cover, on average, the costs of
sustainable production.
Case study: Buying practices and the Fairtrade Minimum Price for cocoa
Fairtrade is a non-for-profit organisation campaigning for companies to pay sustainable
prices and provide for decent working conditions and local sustainable production.279 It is
now a global movement with its most active presence in the United Kingdom under the
Fairtrade Foundation. Fairtrade also runs a certification scheme known as FAIRTRADE
Mark, which means that farmers will benefit from “the protection of the Fairtrade
Minimum Price (where relevant) and the Premium to choose how to invest in their
community”.280
The Premium “is an amount on top of the selling price, paid directly to farmer
organisations to spend on projects of their choice”.281 It is calculated as a percentage of
the amount of produce sold, and helps farmers and workers to ameliorate their
cooperatives and improve their conditions.282
The Minimum Price “defines the lowest possible price that a buyer of Fairtrade products
must pay the producer’.283 It is set following a “consultative process with Fairtrade
farmers, workers and traders and guarantees that producer groups receive a price which
covers what it costs them to grow their crop”.284 Fairtrade has also drafted Guidelines
for Evaluating the Costs of Sustainable Production (“COSP”), which are a central source
279 Fairtrade, "Who We Are", available at: http://www.fairtrade.org.uk/What-is-Fairtrade/Who-we-are. 280 Fairtrade, "Using the Fairtrade Mark", available at: https://www.fairtrade.org.uk/What-is-Fairtrade/Using-the-FAIRTRADE-
Mark. 281 Fairtrade, "Cocoa Farmers to Earn More through a Higher Fairtrade Minimum Price", (3 December 2018), available at:
https://www.fairtrade.org.uk/Media-Centre/News/December-2018/Cocoa-farmers-to-earn-more-through-a-higher-Fairtrade-
Minimum-Price. 282 Fairtrade, "Fairtrade Premium", available at: https://www.fairtrade.org.uk/What-is-Fairtrade/What-Fairtrade-
does/Fairtrade-Premium. 283 Fairtrade, "Frequently Asked Questions", available at: http://www.fairtrade.org.uk/What-is-Fairtrade/FAQs. 284 Ibid.
86
of data for the development of the Minimum Prices, which intend to cover, on average,
the COSP of all producers within the system.285 In any case, if market prices are higher
than the Minimum, Fairtrade traders must pay the market price.
With over the 60% of global cocoa production taking place in Côte d’Ivoire and Ghana,
and 90% of world’s cocoa production grown on small family farms,286 cocoa farmers are
one of the sectors included within Fairtrade’s schemes. In December 2018, Fairtrade
announced an increase of 20% in the Minimum Price and the Premium of cocoa from
October 2019. Accordingly, the Minimum Price for conventional cocoa will be raised
“from $2,000 to $2,400 per metric tonne at the point of export (FOB)”, and the Premium
will be of $240 per metric tonne.287
This increase was introduced in response to the challenges that the West African cocoa
sector faces. In a study published in April 2018, Fairtrade showed that “58% of Fairtrade
certified cocoa farming households in Côte d’Ivoire had incomes below the extreme
poverty line”.288 Hence, the new Minimum Price will enable average Fairtrade cocoa
farmers to earn above the extreme poverty line.
Nevertheless, the new Minimum Prices do not equal a living income for cocoa farmers.
Fairtrade has determined a Living Income Reference Price for cocoa in Côte d’Ivoire and
Ghana, but, unlike the Minimum Price, it is not mandatory for the Fairtrade mark.289
The Fairtrade pricing schemes do not require due diligence. However, it is possible that
any due diligence standard of care would need to take into account the industry
standards set by established mechanisms such as Fairtrade, particularly in sectors such
as cocoa where prices have been developed to reflect living wage.
Remedies and grievance mechanisms 4.11
One component of due diligence is the creation of operational-level grievance
mechanisms for the identification, and where relevant remediation, of impacts. However,
stakeholders highlighted that current grievance mechanisms often fall short in various
respects.
An interviewee who works with businesses in the implementation of the UNGPs explained
that:
Grievance mechanisms can perform a due diligence role as well as a remediation
role. You certainly see stronger grievance mechanisms in connection with the
companies' own operations, as that's where everybody knows that they need to
have hotlines or speak up mechanisms or open doors policies, or things that feel
like more traditional territory. How you translate that thinking into a supply chain
context, they still struggle with.
One interviewee from an international trade association, which works with companies on
their due diligence practices, indicated:
285 Fairtrade International, "Guidance for Estimating Costs of Sustainable Production" (2011), available at:
https://www.fairtrade.net/fileadmin/user_upload/content/2009/standards/documents/3.1_Guidance_COSP_EN_2011-11-
21.pdf. 286 Fairtrade, "Cocoa Farmers", available at: https://www.fairtrade.org.uk/Farmers-and-Workers/Cocoa. 287 Fairtrade "Cocoa Farmers to Earn More…" above n 281. The price for organic cocoa will be $300 higher than the market
price or the Minimum Price, whichever is higher. Further, the Premium will be now the highest of any Fairtrade certification. 288 Fairtrade International, "Cocoa Farmer Income: The Household Income of Cocoa Farmers in Côte d’Ivoire and Strategies for
Improvement" (April 2018), available at: https://www.fairtrade.net/fileadmin/user_upload/content/2009/resources/2018-
04_Management_Response_CDI_Cocoa_Household_Income_Study.pdf. 289 Fairtrade "Cocoa Farmers to Earn More…" above n 281.
87
It seems like, for example, grievance mechanism, the intermediary will know that
at that big farm, there might be 10 posters in the room with 10 different hotlines
but through the supermarkets, they've developed their own grievance process.
They've demanded that every supplier post their phone number on the poster on
the factory or farm rules as part of their terms and conditions and their code of
conduct.
They're doing so probably because they think it might be the right thing to do,
but the consequences that the big intermediary will have a ridiculous number of
colourful posters with a dozen different phone numbers for workers to contact, no
worker knows which of the phone numbers they should be contacting if there's a
problem and they don't trust any of the hotlines because they're all linked to the
company. It's an international company. They don't know who they're speaking
to and what the process is.
Case study: The Bangladesh Accord and Worker Safety
On 24 April 2013 the Rana Plaza building in Dhaka, Bangladesh, collapsed, killing more
than 1,100 and injuring over 2,500 persons.290 It was at the time the deadliest disaster
in the history of garment industry and made the poor labour conditions faced by workers
in the ready-made garment (RMG) sector in Bangladesh which gained attention in the
Western world.291
Following the collapse, brands and retailers joined efforts to address “long-standing
governance gaps around health and safety issues in garment production sites”.292 This
resulted in two competing initiatives: the Accord on Fire and Building Safety in
Bangladesh,293 and the Alliance for Bangladesh Worker Safety.294 The Accord in
particular provides an example of how multi-stakeholder collective agreements,
ultimately led by companies, can lead to binding due diligence obligations and effective
remedies for victims, even where local law enforcement structures have failed.295 The
Accord was signed in May 2013 and consists of a five-year legally binding agreement
between over two hundred mostly European garment brands and retailers and two
global unions (IndustriALL and UNI Global Union), as well as several local trade unions
and witness signatories.296
The Accord provided for an independent inspection programme, public disclosure of all
factories, inspection reports and corrective action plans, a commitment by signatory
brands to ensure sufficient funds are available for remediation, democratically elected
health and safety committees in all factories, and worker empowerment.297 Prior to the
290 International Labour Organization (“ILO”) "The Rana Plaza Accident and Its Aftermath", (21 December 2017), available at:
http://www.ilo.org/global/topics/geip/WCMS_614394/lang--en/index.htm. 291 Julfikar Ali Manik and Jim Yardley, "Scores Dead in Bangladesh Building Collapse" The New York Times (19 October 2018);
Jim Yardley, "Bangladeshi Lab Struggles to Identify Rana Plaza’s Dead" The New York Times (19 October 2018); The Editorial
Board, "One Year After Rana Plaza" The New York Times (20 December 2017). 292 Dorothée Baumann-Pauly, Sarah Labowitz and Nate Stein, "Transforming the Garment Industry in Bangladesh: Sharing
Responsibility" in Sarah Margaretha Jastram and Anna-Maria Schneider (eds), Sustainable Fashion : Governance and New
Management Approaches, Springer International Publishing (2018) 41. 293 The Accord on Fire and Building Safety in Bangladesh, available at: https://www.business-humanrights.org/en/the-accord-
on-fire-and-building-safety-in-bangladesh. 294 Alliance for Bangladesh Worker Safety, available at: http://www.bangladeshworkersafety.org/. 295 Jimmy Donaghey and Juliane Reinecke, "When Industrial Democracy Meets Corporate Social Responsibility — A Comparison
of the Bangladesh Accord and Alliance as Responses to the Rana Plaza Disaster" (2018) 56 British Journal of Industrial
Relations 14 at 2. 296 Bangladesh Accord on Fire and Building Safety, "Accord Signatories", available at:
https://bangladeshaccord.org/signatories. 297 Accord above n 293.
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expiration of the Accord’s five-year term, it was succeeded by the “2018 Accord on Fire
and Building Safety in Bangladesh”, which entered into force on 31 May 2018,298 but was
not signed by all the companies that entered into the Accord in 2013.299
One of the most innovative aspects of the Accord was its enforceable nature through
arbitration and ‘inclusivity of supplier employees via their representatives’.300 However,
the binding nature of these aspects deterred a number of US companies from
participating in the Accord.301
Instead, in July 2013 a number of US garment companies, which had not signed the
Accord, launched the Alliance for Bangladesh Worker Safety.302 This initiative was ‘built
upon a fairly traditional CSR-based approach, resulting in collective, transnational
industry self-regulation’.303 The Alliance did not require participating companies to
contribute any funds, lacked enforcement provisions, was negotiated without worker
representatives and did not provide for a space for worker representatives in its
governance.304 These shortcomings made critics consider the Alliance ‘as an effort to
undercut the Accord by providing a less onerous and less rigorous alternative’.305
The Alliance ceased its activity on 31 December 2018, and was not continued by a
subsequent agreement.306 The members of the initiative argued that “with an ecosystem
of safety now in place”, they were transitioning to “work through a locally-based
organisation to collectively monitor safety standards”.307 Critics have noted that “it is by
far too early to state [that]… at present the RMG is safe with regard to fire safety”.308
Both the Accord and the Alliance have been deemed positive interventions in
Bangladeshi RMG sector, as they have shown that collective inspections can improve
workers’ safety.309 Most particularly, the Accord represents a novel example, insofar as it
is binding, inclusive and enforceable.310 It is also noticeable that the Accord’s the
enforcement mechanism appears to work. Two arbitrations cases raised by unions
against fashion brands which were in breach of the agreement were settled before the
Permanent Court of Arbitration in 2018.311
These examples, and in particular the Accord, present examples of how companies can
collectively provide for binding obligations to improve human rights conditions in the
supply chain, even in a notoriously high risk sector and country. In the case of the
Accord these obligations included commitments to provide financial resources towards
improvements in suppliers’ factories, and enforceable arbitration mechanisms which
298 2018 Accord on Fire and Building Safety in Bangladesh, available at: https://admin.bangladeshaccord.org/wp-
content/uploads/2018/08/2018-Accord.pdf. 299 Industriall, “Brands that have not signed the 2018 Accord” (30 August 2018), available at: http://www.industriall-
union.org/brands-that-have-not-signed-the-2018-accord. 300 Jaakko Salminen, "The Accord on Fire and Building Safety in Bangladesh: A New Paradigm for Limiting Buyers' Liability in
Global Supply Chains?" (2018) 66 The American Journal of Comparative Law 411 at 416. 301 Ibid. 302 Alliance for Bangladesh Worker Safety above n 294. 303 Donaghey and Reinecke above n 295 at 2. 304 Mark Anner, Jennifer Bair and Jeremy Blasi, "Toward Joint Liability in Global Supply Chains: Addressing the Root Causes of
Labor Violations in International Subcontracting Networks" (2013) 35 Comparative Labor Law & Policy Journal 1 at 30. 305 Ibid. 306 Alliance for Bangladesh Worker Safety above n 294. 307 Alliance for Bangladesh Worker Safety, "Alliance Fifth Annual Report 2018", (11 December 2018), available at:
http://www.bangladeshworkersafety.org/488-2018-annual-report-press-release. 308 Erik Wiersma, "Fire Safety in the Ready-Made Garment Industry in Bangladesh, Five Years after Rana Plaza", Safety in The
Garment Industry, Five Years After Rana Plaza (2018), available at:
https://www.researchgate.net/profile/Erik_Wiersma2/publication/326175338_Fire_Safety_in_the_Ready-
Made_Garment_Industry_in_Bangladesh_Five_Years_after_Rana_Plaza/links/5b3c702ca6fdcc8506eeeee3/Fire-Safety-in-the-Ready-Made-Garment-Industry-in-Bangladesh-Five-Years-after-Rana-Plaza.pdf at 23. 309 Donaghey and Reinecke above n 295 at 25. 310 Salminen above n 300 at 450. 311 Permanent Court of Arbitration, "Bangladesh Accord Arbitrations", available at: https://pca-cpa.org/en/cases/152/;
Covington "Covington Helps Secure Historic Settlement in Arbitration under the Accord on Fire Building Safety in Bangladesh",
(22 January 2018), available at: https://www.cov.com/en/news-and-insights/news/2018/01/covington-helps-secure-historic-
settlement-in-arbitration-under-the-accord-on-fire-and-building-safety-in-bangladesh.
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have led to real-life compensation and remedy for victims.
Incentives for undertaking due diligence 4.12
Survey respondents were asked for their views on what is, or will become, companies’
main incentives to undertake due diligence for these impacts through the supply chain.
When asked about what the primary incentives for undertaking due diligence is, or have
been, it is noticeable that the top three incentives selected by business respondents (in
the business survey) and industry organisations (in the general stakeholder survey)
were the same and in the same order: The top incentive for undertaking due diligence
was reputational risks (66.19% for business respondents, 65.52% for industry
organisations), followed by investors requiring a high standard (51.08% for business
respondents, 55.17% for industry organisations), and consumers requiring a high
standard (46.76% for business respondents, 55.17% for industry organisations).
This demonstrates that despite a divergence in views on regulatory options between
these two groups (discussed below), industry organisations have a real understanding of
the risks and incentives which drive business to undertake due diligence.
For business respondents, these incentives were followed by operational risks (42.25%),
which, after financial risk (51.72%) was also the fifth top selected incentive selected by
industry organisations (44.83%). Regulation requiring reporting on steps taken was the
fifth most selected incentive by business respondents (41.73%). This was followed by
financial risks (41.01%) and employees requiring a high standard (36.69%).
The four least selected incentives by business respondents were (from highest to lowest)
regulation which allows for sanctions or fines (33.81%), standards required for export
credit or procurement contracts (25.90%), regulation which allows for judicial oversight
over steps taken (21.58%) and risk of litigation by those affected (20.14%). It is notable
that these are the incentives related to regulation or legal requirements.
Industry organisations placed a similarly low value on the ability of regulatory measures
to incentivize due diligence: The bottom four selected incentives by industry
organisations were regulation requiring reporting on steps taken (31.03%), risk of
litigation by those affected (20.69%), regulation which allows for sanctions / fines
(17.24%) and regulation which allows for judicial oversight over steps taken (10.34%).
In contrast, more than two thirds (67.86%) of general respondents viewed regulation
which allows for sanctions or fines as the highest incentive for companies to undertake
due diligence. This was followed by investors requiring a high standard (62.50%),
financial risks (60.71%), reputational risks (58.33%). Thereafter, the other legal-related
incentives followed: risks of litigation by those affected (53.57%), regulation which
allows for judicial oversight over steps taken (52.38%), regulation requiring reporting on
steps taken (48.21%) and standards required for export credit or procurement contracts
(45.83%). This was followed by consumers requiring a high standard (36.31%) and
operational risks (35.12%). General survey respondents viewed the least likely
incentives for companies to undertake to due diligence to be employees requiring a high
standard (16.67%).
Civil society stakeholders have a particularly high view of the value of regulation to
incentivize due diligence: As many as 87.10% selected regulation which allows for
sanctions or fines as the top incentive, followed by regulation which allows for judicial
oversight over steps taken (69.89%), and risk of litigation by those affected (66.67%).
This is followed by investors requiring a high standard (64.52%), financial risk (62.37%)
90
and regulation requiring reporting on steps taken (51.61%). Reputation risk was
selected by only 50.54% of civil society stakeholders, despite being the top incentive for
both business and industry organisation respondents.
Q16 Business Survey; 139 responses – Q13 Stakeholder Survey; 168 responses.
It is notable that business and general survey respondents, particularly civil society
respondents, have such contrasting views on what the incentives are, or have been, for
companies to undertake due diligence. Business respondents and those from industry
organisations, regulation or litigation risks ranked these as lowest of all the incentives
(apart from regulation which requires reporting in the case of business respondents).
This may be because, for the most part, these legal risks do not currently exist, and
respondents were asked about current or past incentives.
In contrast, general stakeholders have rated the legal incentives as the highest. Given
the stated purpose of the survey, it is likely that general survey respondents, and in
particular civil society stakeholders who are campaigning for or supporting mandatory
66.19%
51.08%
46.76%
42.45%
41.73%
41.01%
36.69%
33.81%
25.90%
21.58%
20.14%
13.67%
65.52%
55.17%
55.17%
44.83%
31.03%
51.72%
34.48%
17.24%
34.48%
10.34%
20.69%
24.14%
50.54%
64.52%
29.03%
31.18%
51.61%
62.37%
6.45%
87.10%
46.24%
69.89%
66.67%
9.68%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Reputational risks
Investors requiring a high standard
Consumers requiring a high standard
Operational risks
Regulation requiring reporting on steps taken
Financial risks
Employees requiring a high standard
Regulation which allows for sanctions / fines
Standards required for export credit or procurement contracts
Regulation which allows for judicial oversight over steps taken
Risk of litigation by those affected
Other (please specify)
Businesses Industry organisations Civil society/NGOs
91
due diligence, may have answered the question with respect to anticipated future
incentives. As such, general stakeholders placed a much higher value on the importance
of regulation to incentivize due diligence than business do.
Where regulation is not binding or enforced, such as voluntary initiatives or reporting
requirements, they are often primarily aimed at incentivizing companies through
reputational risks. The above statistics highlight the importance of reputation risk for
companies. However, interviewees highlighted the limitations of reputational risk as an
incentive for due diligence. One interviewee from an international civil society
organisation indicated:
[Reputational pressure] only works for companies that are consumer-faced. And
there are a lot of companies that nobody knows of, basically. Either they are
intermediaries, so people don’t really know the name of the companies, or they
work in public procurement or in the public sector, or they supply for example
retailers. So their own names never appear, so consumers don’t know them. So
it’s difficult to put public pressure on them. That’s why we think mandatory
regulation would be really helpful.
Another risk of relying on reputation incentives is that due diligence efforts in reaction to
scandals, or potential scandals, are focus only on those aspects which are, or may be,
exposed in the public domain, potentially overlooking more severe risks which remain
unseen. One interviewee from an international organisation which focuses on child
labour indicated that:
If you look at cocoa as an industry, the biggest concern has always been around
child labour, at least for the last 20 years. The key human rights due diligence
elements focus on child labour. And recently another element of due diligence
was related to the environmental impacts linked to deforestation. How they
started? Both in reaction to scandals.
The interviewee added that:
Normally due diligence [...] is mostly driven by either scandals, lawsuits or other
legal issues that they have in importing countries if the end consumers are
particularly active. This has been brought to life in a responsive way… If you
observe companies' behaviour, it has been: 'Okay let's do at least something
minimal to react, to show that we do have something in place, so to start
counterbalancing, or kind of being protected against some of the criticisms that
we have been receiving from the media and from consumers’.
Digital technologies 4.13
It has been proposed that the use of digital technologies could assist business with their
supply chain due diligence, and also reduce costs. Accordingly, survey respondents were
asked about their use of digital technologies for supply chain due diligence. This is
discussed in the section assessing the potential impacts of the regulatory options and
will not be repeated here.
Nevertheless, one company interviewee indicated that they increasingly explored the use
of technologies, including digital payments and worker surveys, and that they are in the
process of developing an internal app:
We have now the capabilities to go to the worker directly, to ask the worker what
do you feel, what do you need. And something the methods that we have is
actually quite old fashioned. So this for us is something is going to happen more.
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One interviewee working within the government of a large Member State indicated:
This technology aspect can be a door opener to getting a forward-driven
discussion on this, by saying [it is, for example, part of the] EU research agenda,
the kind of research we promote. Having a mandatory due diligence law might
lead to the effect that we have more funds for research and development
channelled into this field. And that suddenly we might find new technological
approaches, which really improve the way we manage supply chains in a social
perspective. So far, we have not yet invested enough into new innovative
approaches. With this technological view, we could try to link our human rights
agenda to an industrial innovation agenda, with the innovation objective of
promoting human rights. There is not enough on this.
Overall views on current due diligence practices 4.14
General survey respondents were asked in which way do they consider that current due
diligence practices fall short. Although this question was optional, it was answered by
144 respondents. Many of these were lengthy and detailed answers, and could not all be
set out here. Some comments are listed below, and a larger selection of comments are
listed in PART IV: Annexure A.
The general conclusion is that general stakeholders are of the view that current due
diligence practices are significantly insufficient to address human rights and
environmental impacts.
“…For many companies human rights due diligence amounts, at best, to
reporting.” [Further elaboration in Annexure A]
“By relying almost exclusively on audits and private certification for compliance
despite ample evidence of their shortcomings.”
“Risk analysis often focused on supply chain rather than entire value chain
effectiveness of grievance mechanisms as a major challenge: especially for third
parties/potentially affected understanding the difference between traditional "risk
management" (risk to the company) as opposed to human rights risk
management (risk to the people) understanding the difference between
traditional (legal) due diligence processes and "human rights due
diligence"/"responsible business conduct" in line with the UNGPs/OECD Guidance
prioritization of issues (e.g. according to severity) identification of leverage and
appropriate measures (what can I do if I have little influence?)”
“I would say in almost every aspect. Companies are not legally required to
exercise due diligence, so mainly any company that voluntarily decides to do so
applies its own notions and considerations of what a due diligence process should
be. This most of the time leads to non- effective mechanisms and activities that
just serve to comply with reputational criteria.”
“Current company practices for due diligence are often gender-blind and as such
fall short of identifying the specific risks and differentiated impacts faced by
women across a company's operations or supply chains. This is a key gap, as
there is mounting evidence of the disproportionate and different ways that
women are impacted by business activities…” [Further elaboration in Annexure A]
“Process instead of impact oriented. It's done by a separate silo inside the
company, not very much on the radar of the commercial decision makers and
therefore all too often not guiding actual business decisions. Often poorly
executed, by consultants, and then cherry picked for their implications.”
93
“In general, my perception is that many SMEs and small mid-cap companies have
a very low level of focus and awareness on human rights and environmental
aspects of their industry”
Due diligence not applied across all operations and across the entire value chain
(beyond tier one supplier). Often lack meaningful engagement and consultation
with rights-holders.
“Companies lack knowledge of their complex and fragmented supply chains. Even
though risks may be identified, they lack knowledge/skills/expertise to address
these. In many cases, given that they have thousands of suppliers, they are able
to perform DD only on a few. DD usually means audits and reports but not
addressing risks.”
“Due to the lack of mandatory requirements, some companies lack due diligence
processes. For the ones that have due diligence processes in place, social and
human rights are most of the time covered, but the environment component is
often the most absent; the climate change component (in terms of emissions
reductions) is often there, but not as regards biodiversity, environment footprint
mitigation (e.g. deforestation).”
“Mainly the need to prioritise, based on salient impacts, rather than tackle
everything at the same time”
“Too much focus on reporting and audits and too little implementation and actual
engagement throughout the value chain. Sometimes engagement but then
purchasing practices fall short of standards.”
5. Stakeholder views on impacts of regulatory options
Our surveys asked questions about the likely impacts of the possible regulatory options
set out in the Problem Analysis and Regulatory Options below. The views of stakeholders
collected during our surveys and interviews will be set out here with respect to each of
the regulatory options put to the survey respondents. These findings will be further
discussed in the assessment of regulatory options below.
The business survey asked respondents within companies about estimated costs and
benefits of each regulatory option. Both business and other stakeholder survey
respondents were asked about the sustainability impacts of the various regulatory
options. Sustainability impacts were categorized as social, environmental and human
rights impacts. The costs and benefits findings are discussed in detail in the assessment
of regulatory options, and will not be included here.
Option 1: No policy change (baseline scenario) 5.1
Ten years ago, there were very few domestic-level regulations requiring companies to
report on their human rights and environmental risks and implement human rights and
environmental due diligence processes.312 Over the past few years, governments have
increasingly been embedding reporting and due diligence requirements into regulatory
provisions. The current legal framework applicable in the EU generally, and in various
Member States is described in the Regulatory Review section. For the purposes of this
312 GBI and Clifford Chance, "Business and Human Rights: Navigating a Changing Legal Landscape", (9 March 2019), available
at: https://www.cliffordchance.com/briefings/2019/03/business_and_humanrightsnavigatingachangin.html at 3.
94
section, it is noted that there is currently no general legal standard which requires
companies to undertake substantive due diligence at EU level.
Survey respondents were asked for their views on the current regulatory landscape.
They were asked whether they agreed, disagreed or did not know about certain
statement relating to the effectiveness, efficiency, coherence of and legal certainty
provided by the current legal landscape.
Overall, the majority of stakeholders interviewed and surveyed considered existing laws
on due diligence requirements for human rights and environmental impacts not to be
effective, efficient and coherent.
The majority (52.55%) of business survey respondents indicated that, in their view,
existing laws on due diligence requirements for human rights and environmental impacts
through the supply chain are not effective, efficient and coherent. Less than half of this
number, and only 25.55% of business respondents, felt that existing laws were effective,
efficient and coherent. The remainder did not know.
Similar trends were reflected amongst large business respondents with over 1000
employees, 53.06% of which disagreed and 27.55% agreed that existing laws on due
diligence requirements for human rights and environmental impacts through the supply
chain are effective, efficient and coherent. The remaining 19.39% did not know.
Amongst SME survey respondents with 9 employees or less, 28.57% disagreed that
current laws are effective, efficient and coherent, and 14.29% agreed, with over half
(57.14%) indicating that they did not know.
For contrast, general survey respondents were posed the same question. Overall, they
expressed a similar but even stronger view, in that 81.05% of general survey
respondents indicating that existing laws on due diligence for human rights and
environmental impacts are not effective, efficient and coherent. Only 8.5% agreed with
the statement that existing laws are effective, efficient and coherent.
When broken down according to stakeholder group, there is a marked difference
between the responses from civil society respondents and industry organisations.
Whereas both groups agreed that existing laws are not effective, efficient and coherent,
this view was expressed by 88.51% of civil society in contrast to 58.33% of industry
organisations. In contrast, almost a third of industry organisations (29.17%) agreed that
existing laws are effective, efficient and coherent, when only 2.3% of civil society
organisations shared this view. The remaining 9.20% of civil society and 12.5% of
industry organisation respondents did not know.
95
Q17 Business Survey; 137 responses - Q17 Stakeholder Survey; 153 responses.
One interviewee from civil society agreed that the existing framework was not effective,
efficient and coherent, explaining:
The coherence is not too bad, but effective and efficient not really. The non-
financial reporting directive coherence, the elements that companies have to
report on is quite helpful. But if we think back to the environmental side, there
are now lots of different regulations and there is a risk there that things just
become fragmented. I am sure business have said to you that actually we feel
like there are more and more requirements on us, and they don’t fit together,
they are all slightly different. So something that harmonises that would be useful
for everyone.
Another interviewee with expertise in business and human rights in Germany also
highlighted the incoherence of a sector- or commodity-specific approach:
We don’t know yet whether the scheme of approved certifiers actually works out
well. There is for example a restriction on four minerals. You can ask why those
four? And we see a growing number of other minerals that are getting more and
more important. Is that coherent? I don’t think so.
General survey respondents were also asked whether they agreed or disagreed that, or
did not know whether, the current legal landscape provided companies with legal
certainty about their human rights and environmental due diligence obligations.
The majority of general survey respondents (78.57%) indicated that the current legal
landscape does not provide companies with legal certainty about their human rights and
environmental due diligence obligations. However, the views of civil society respondents
and industry organisation respondents are notably different in this respect. Whereas
both groups view current laws as not providing legal certainty, 88.64% of civil society
respondents were of this view, in contrast to only 50% of industry organisations. In turn,
only 5.68% of civil society respondents agreed that existing laws do provide legal
certainty, a view which is shared by as many as a third (33.33%) of industry
organisation respondents. The remaining 5.68% of civil society respondents and 16.67%
of industry organisation respondents do not know.
25.55% 29.17%
2.30%
52.55% 58.33%
88.51%
21.90%
12.50% 9.20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Businesses Industry organisations Civil society/NGOs
Agree Disagree Do not know
96
Q16 Stakeholder Survey; 154 general respondents.
A survey respondent from a trade union organisation elaborated:
The current legal framework does not provide businesses with legal certainty
because the status quo (i.e. no European regulation and only few national legal
frameworks – often sectorial and not effective) is linked with fragmentation and
with an uneven playing field in the single market.
One industry organisation with over 16 000 members responded in the survey that their
reason for disagreeing that existing laws provide business with legal certainty is as
follows:
EU -companies are doing extremely well and a lot in order to make sure that
human rights are not violated in the companies they do business with. Now we
need to really obligate those subcontractor -companies to conduct their business
according to the standards they are obligated to. As our answer "disagree" to this
question…comes from the view that EU -companies at the end cannot feel
absolutely safe and certain on their human rights and environmental due
diligence obligations, because the different actors at the value chain / end level
subcontractors cannot be efficiently obligated to comply with the standards. Even
[when] there are third party evaluations and screenings and different audits on
these issues, still the subcontractors would need to be obligated more heavily to
comply with human rights obligations. Surely there are many subcontractors that
are performing very well in practice, but in general the big picture is as described.
As evidenced from the Regulatory Review, the existing regulatory frameworks within
different Member States are different. Similarly, and perhaps as a result, companies
operating within different Member States are frequently at very different stages of their
so-called “business and human rights journey”. For example, one interviewee from a civil
society organisation which works with business in Poland indicated that:
The level of awareness that companies have of the necessity to do something in
this area is very limited….More generally this topic is still very new [in Poland].
12.99%
33.33%
5.68%
78.57%
50.00%
88.64%
8.44%
16.67%
5.68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
General Stakeholders Industry organisations Civil society/NGOs
Agree Disagree Do not know
97
As indicated above, stakeholders reported that, despite the existing requirements,
current company practices for human rights and environmental due diligence in their
own operations or throughout their supply or value chains fall short in various ways.
Nevertheless, it was felt that the recent legal developments on due diligence have been
useful in terms of driving business practice and focusing attention on human rights
issues. One interviewee which advises business on their due diligence indicated:
I think the one thing that has been the strongest social impact is maybe boosting
people's awareness of some of the discussions on the responsible business space.
Everyone is now broadly aware that modern slavery is an issue. It wouldn't have
been the case before these laws were introduced. It's more on people's radar and
that seems like a useful thing…. Too few people are doing proper human rights
impact assessments, not at the corporate level but at the granular level. There
are some companies that do this very well and very consistently. But they are a
lot of companies are finding that really hard, which is partly a resource issue and
partly figuring out where to prioritize and where to start.
Most interviewees were in principle in favour of a policy change to introduce a general
standard at the EU level, although they differed on aspects of liability and methods of
enforcement. The level playing field and legal certainty were amongst the most
important considerations for business interviewees, whereas general interviewees
highlighted the lack of access to remedies and poor levels of corporate implementation
of due diligence.
However, it is noted that industry organisation survey respondents were generally not in
favour of the introduction of new policy changes, including mandatory due diligence. It
was noted that various steps have already been made in terms of voluntary guidelines
and other existing requirements. These more detailed findings will be discussed in
relation to key questions below, and contrasted where relevant where the responses of
multinational companies.
One interviewee working for a large trade association in the Netherlands indicated that:
“Multinationals are now requesting unified rules, as they do not want to be involved in all
kinds of national agreements.” Another interviewee working for a financial institution
mentioned, amongst the benefits of legislation, that "sometimes it helps to get things
done, it gives you a push in the right direction".
One interviewee working with the government of a large Member State indicated:
In general there is a feeling in [my country's] government that some kind of
harmonised or unified EU approach and progress on due diligence is something
that we need, so no policy change is certainly not a good option for us.
One interviewee working for a commerce association in a Member State where there is
currently a campaign, which is supported by business, for mandatory human rights and
environmental due diligence:
No policy change is not really an option after hearing our companies. Something
needs to be done. That’s quite clear.
Option 2: New voluntary guidelines / guidance 5.2
All interviewees across business and other stakeholders agreed that there is already
enough voluntary guidance in existence. However, it is noted that the majority of survey
respondents from industry organisations had a preference for voluntary guidelines as
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regulatory option, drawing attention to the influential nature of those soft law
mechanisms already in existence.
One interviewee, who advises companies on their due diligence, indicated:
I'm just not sure what a regional document would add to the UN Guiding
Principles. Fragmenting attention away from an international standards is just
confusing to people.
An interviewee from an international civil society organisation summarized the general
position of stakeholders concisely:
There is enough documentation that voluntary standards have not brought the
change that we need. The majority of business are not discharging their
responsibility towards human rights.
Similarly, survey respondents overall seemed unconvinced that new voluntary guidance
would have notable social, environmental and human rights impacts. When asked
whether new voluntary guidance would have social impacts, business respondents were
fairly evenly split, with 40.71% indicating that it may have social impacts, and 35.40%
that it is unlikely to have social impacts. Business respondents indicated by 41.07% that
new voluntary guidance is unlikely to have environmental impacts, with 33.93%
indicating that it may. Similarly, a greater number of business respondents (40%)
indicated that new voluntary guidance is unlikely to have human rights impacts, with
38.18% indicating that it may.
General survey respondents were even more dismissive of the likely impacts of new
voluntary guidance. Over two thirds (67.11%) indicated that new voluntary guidelines
will not have social impacts,313 even more (68.46%) believed that it would not have any
environmental impacts,314 and similarly, 68.46% thought that it is unlikely to have
human rights impacts.315
Interviewees indicated that voluntary guidance could be helpful to supplement any legal
obligations. For a further discussion on the role of non-binding guidance to accompany a
binding legal standard, see the Problem Analysis and Regulatory Options section.
One interviewee from a civil society organisation indicated that:
We have been in a situation where there has been plenty of voluntary guidelines
for a number of years and we still have way more human rights violations in the
global value chains than we should.
Another interviewee from civil society stated that:
There is an abundance of evidence that the voluntary mechanisms are not
working sufficiently. Looking across a wide-range of sectors, you get this
conclusion that the current state of affairs of due diligence, based on the largely
voluntary implementation mechanisms that are there, leads to a quite ad hoc,
unsystematic, in general relatively low uptake of due diligence processes.
The interviewee added:
313 Contrasted with 25.5% of general survey respondents who thought that new voluntary guidance may have social impacts. 314 Contrasted with 18.79% of general survey respondents who thought that new voluntary guidance may have environmental
impacts. 315 Contrasted with 22.15% of general survey respondents who thought that new voluntary guidance may have human rights
impacts.
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It's now 8 years or so since the normative expectation of due diligence came into
play with the Guiding Principles and the OECD Guidelines. Obviously there's a bit
of a grace period for people to get adjusted but the pace of take up is just far,
far, far too low and the way it's been taken up is very much ad hoc and not
structural and I think that that does indicate that if we want companies to take
this seriously we need to move towards more legislative and regulatory forms of
expecting them to do so.
Another interviewee from civil society indicated that:
The voluntary guidelines have not delivered in practice…I wouldn't go for more
guidance, because it's not about the guidance, it's about doing it, actually.
Several interviewees also highlighted that, due to the nature of due diligence, existing
voluntary guidance will influence the standard of due diligence that would be expected of
companies under each specific circumstance. For example, one interviewee indicated:
I think there are already enough guidance on which to base an understanding of
the scope of due diligence. Not only the UNGPs, but the OECD guidance and all
the guidelines on specific sectors too. I think this would be [what] a judge may
refer to.
One interviewee from an environmental NGO mentioned, with regard to deforestation,
that:
One of the problems is that not all companies have taken on ‘no deforestation’
commitments. Some of the more publically exposed ones ... may have taken on
zero-deforestation commitments, but then others who are less publically exposed
... or traders that nobody has heard about, but that are hugely profitable and
significant actors in the value chain ... they are less likely to even make a
commitment in the first place or to be conducting due diligence on a voluntary
basis ... There is a problem of free-riders, the majority of the market is not taking
on voluntary due diligence and it's just a few that are publically exposed actors
that are doing that.
The other problem is that in practice, even when companies make commitments,
they aren't enforcing them. There is no accountability for failure to meet a, for
example, zero-deforestation commitment.
Option 3: New regulation requiring due diligence reporting 5.3
The third option for consideration is new regulation requiring companies to report on
their due diligence. It is noted that unlike mandatory human rights and environmental
due diligence duties, which are still rare, various existing laws already require some form
of reporting on due diligence for human rights and environmental impacts.
However, existing reporting laws do not currently require, by way of law, compliance
with the first three components of due diligence (identification and assessment, taking
actions to address, and tracking effectiveness). Most existing laws are also currently not
enforced by way of sanction for a failure to report.316 These existing laws are discussed
in more detail in the Regulatory Review, but it should be borne in mind that experiences
316 Some examples exist in the English system where companies have been fined for shortcomings in their reports. See the UK
country report in section 3 Regulatory Review.
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with these laws have expressly informed survey respondents and interviewees responses
discussed below.
Survey respondents were asked whether new regulation requiring due diligence
reporting would be likely to have social, environmental or human rights impacts. Here,
survey respondents were more positive about the likely impacts than with new voluntary
guidance.
The majority (50.47%) of business survey respondents indicated that new reporting
requirements would have social impacts,317 and 40.9% that it would have impacts on the
environment.318 A slightly larger majority (55.24%) of business respondents indicated
that new regulation requiring due diligence reporting would have impacts on human
rights, which contrasted with only 18.10% who indicated that it would not.
Similarly, the majority (52.03%) of general survey respondents indicated that new
reporting requirements on due diligence would have social impacts.319 General
respondents were more evenly split on whether it would have environmental impacts,
with 44.59% indicating that it would, and 39.19% that it would not. Similarly, 47.97% of
general respondents indicated that new reporting requirements on due diligence are
likely to have human rights impacts, whereas 39.86% believes that it would not.
The figures regarding the likely sustainability impacts of new reporting requirements are
rather high, particularly given the existence of the EU non-financial reporting directive
which already requires reporting on due diligence process. Moreover, these views on the
potential impacts seem to be high in light of the perceptions about the limitations of
reporting requirements which were expressed frequently by interviewees and survey
respondents across business and other stakeholders.
Various regulatory reviews and civil society reports, which are set out in the Regulatory
Review section, have highlighted that existing reporting requirements have led to low
levels of reporting and poor quality of reports. Our interviewees confirmed these
shortcomings of reporting requirements, from their experience. Most had strong views
regarding the limitations of reporting requirements.
The following explanation by an interviewee from an international civil society
organisation summarises the general views of interviewees:
The [EU] non-financial reporting directive is not at all a context in which adequate
due diligence could be actually regulated or encouraged. Because it is an annual
report of managers in the context of accounting. When you look at reporting on
due diligence there is much more than needs to be done. Not only whether it has
been done, not only outputs, or so. I mean, there is a lot of information that
needs to be disclosed anyway to enable and empower stakeholders to engage in
the identifying [and] mitigating process. That’s the one thing.
The other thing is, as a concept as such, we urgently need definitions of the
standard of care. A [law] imposing what the standard of care is. And if you
regulate reporting and disclosure, you just don’t do it. I mean, you indirectly
hope to trigger certain processes and to trigger due diligence, but what we need
at the moment is: What is the standard of care? That needs to be defined…You
need processes in courts or through authorities actually to concretise the
standards of care. We need access to remedy. And this would all not be feasible
with a requirement to disclose because there the obligation is the disclosure. And
317 Contrasted with 22.43% of business respondents which indicated that new reporting requirements on due diligence are
unlikely to have social impacts. 318 Contrasted with 32.38% of business respondents which indicated that new reporting requirements on due diligence are
unlikely to have environmental impacts. 319 Contrasted with 37.84% of general respondents which indicated that new reporting requirements on due diligence are
unlikely to have social impacts.
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sanctions [there] are linked to disclosure and not to standard of care, or harm,
and that’s what we actually need.
Stakeholders noted that because reporting requirements rarely provide for a sanction in
the case of a failure to report, they have been shown to result in low levels or reporting,
and low quality reports. For example, interviewee from an international trade association
who works with companies on their due diligence indicated:
[The UK Modern Slavery Act] has proven partly effective in terms of
transparency. We know there are many thousands of companies who are not
adhering to the non-slavery act in the UK, for example, but we ignored it. There's
very limited enforcement of that law by the UK government … I think it's a real
limited value. It does not allow consumers to really interrogate whether the
supermarket they shop at or the clothing company they buy at are really ethical.
They can't determine this. It's too difficult, you can't expect individuals to be able
to assess those practice through a one-page glossy CSR statement … [Reports
are] very catchy, very inconsistent in terms of what's reported, and how. And
lacking quantitative data to really determine that [there are] good measure[s].
No data on wage level for instance.
Similarly, an interviewee from a civil society organisation which has worked on company
reporting under the EU non-financial directive stated that:
The EU non-financial directive establishes a legal duty for companies to disclose
their [due diligence] practices. The form of how they are meant to comply with
that duty to disclose has not been clarified in that directive. It's the opinion or
ours and other NGOs and some companies indeed that it should be specified as
the UNGPs human rights due diligence reporting framework. Precisely because it
is so clear, and defined and methodologically guiding. It explains to companies
how they should identify their human rights risks, with salience rather than
materiality being the guiding sort of principle for their business operations and
then how best to prevent, mitigate, remedy, etc.
In addition, stakeholders also criticized reporting requirements insofar as they do not
require any substantive due diligence to take place. An interviewee explained that “[i]t
doesn't make sense to require companies to report on something that they are not
required to do.”
Similarly, another interviewee from a civil society organisation referred to the
implementation of the UK Modern Slavery Act, that:
Only with transparency requirements, you don't really drive change. You don't
really achieve real change…[L]ooking at the implementation of the UK Modern
Slavery Act transparency in supply chains provision, the result that we are seeing
is that companies are only required to disclose their efforts to combat human
trafficking. They are only required to disclose what they do in case they do
something. But if they don't do anything at all, actually there are no real
consequences. So the fact that you give these comply or explain options to
companies means that at the end they are not required to undertake any kind of
real action.
A co-interviewee from the same organisation added, with reference to the EU Non-
Financial Directive, that reporting requirements tend to focus on the provision of
information to shareholders and investors:
Reporting requirements in and of themselves do not stimulate change in
corporate behaviour. That's acknowledged in numerous literature studies. We see
in the discussions with the NFR and the like that it's really intended as giving
information to investors. Which is an altogether different policy objective as to
change corporate behaviour. It's really about letting investors know where the
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most ethical behaviour is, where they can move their money, which is an
altogether different policy objective to ensuring a proper response in terms of
conduct let alone access to justice for victims.
Another interviewee from an international trade association highlighted that:
[T]ransparency is not an end into itself. In that, you could force companies to
disclose more information. It does not automatically lead to improved conditions
in the supply chain.
One interviewee working within the government of a large Member State where a due
diligence law is being considered indicated that:
We hear from the UK Modern Slavery Act that it seems to be not very effective
because it is a mere reporting exercise with no state control to it, but it’s rather
left to the civil society like NGOs to make use of this information. It seems that
there is a growing disenchantment with the effect of this. Also, companies
learned how to use it and deal with it, so now there is professional industry that
delivers the right statements, there’s a large feeling that they become hollow.
Interviewees across business and other stakeholders agreed that new reporting
requirements on due diligence would not be desirable. One interviewee from a
transnational company indicated:
Making it mandatory for companies to say whether they are doing something or
not is not enough, companies should have to do something.
Similarly, an interviewee from civil society suggested that new regulation should go
beyond requiring reporting:
There is already really a plethora of these reporting requirements. And what we
have seen is that literally a handful of companies put out meaningful information,
and then use that to reflect on the way they do business. If all that you have to
do is report, you don’t have to actually to do anything. And you can report that
you have done nothing and that is an adequate report…I do think more reporting
is not going to drive changes in practice.
The interviewee added:
With reporting, companies all look around to see what somebody else is
doing…’Ok so someone has written a three page report, so we’ll do that as well.’
The theory about reporting is that it drives a race to the top. I think in fact it
drives a race to the middle. Companies will say - I have had people say this to
me – ‘Oh, we came out in this ranking, we were about 40%. Our CEO said: Well I
don’t really like that, where’s everyone else at? They’re all at about 60. So what
do we need to do to get ourselves up to 60?’ Not 100. I think we need to factor
that kind of thing in.
It was noted by more than one interviewee that there is also a risk of unintended
adverse consequences if reporting is the end goal of the legal requirement, as companies
may be taking important but sensitive steps as part of their due diligence, about which
they should rather not be reporting. One interviewee from civil society indicated:
Companies might not be reporting on everything they are doing, because it’s kind
of sensitive, involved negotiations with unions, or there is some kind of issue
where you maybe do not want to publicize it, perhaps it’s around sexual abuse,
there is a risk to the people involved.
This risk of a disproportionate legislative focus on the reporting component of the due
diligence process was confirmed by an interviewee from a multinational food and drinks
company:
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I think we need to be careful to avoid generating unintended consequences.
Because in our experience when we engage not only with our people in the
markets, in the country operations, but also suppliers, business partners, and
also stakeholders like NGOs … based in these countries. One thing that really
helps us get to the bottom of the issues that we are looking at as part of human
rights impact assessments is…the kind of confidential nature of the human rights
impact assessments.
And I am saying that because it is a very different exercise, I think, when you
carry out some sort of human rights impact assessment, when it is confidential
and when it is not. Basically…the kind of results you will get are different.
Because the confidence of people to share that with you is different. And there is
a risk that if, from the beginning, if you actually make this process fully open and
transparent, then you basically commit or have to disclose all the results and
findings. There is huge risk that you won’t actually get to the bottom of things.
And one of the objectives of any law, and this law in particular, should actually be
to improve the situation on the ground. And I fear that if we go for too much
disclosure requirements, this is not what we will achieve.
Now, having said that, there is still of course a lot of room for openness,
transparency and disclosure, but maybe not that much in terms of the findings,
but more in terms of the action plan, so the remediation action. And I think that
is a huge difference. Because then it is also allows companies to focus on things
they commit to improving based on risks but without having to disclose them.
One interviewee also highlighted that law which only requires reporting, but not the
other components of due diligence, tends to focus on listing or quantifying the steps
taken, but do not focus on the actual effectiveness of steps taken. An interviewee who
works with businesses in the implementation of the UNGPs stated that reporting - the
fourth components of due diligence - is less meaningful if it not accompanied by the
tracking of effectiveness - the third component of due diligence:
I think the other area that businesses find very challenging is the third step of
due diligence which is tracking. How do you actually know if what you're doing is
leading in any way to better outcomes for people, rather than simply measuring
the activities that you're conducting as a business? So the number of audits, the
number of staff trained, the number of suppliers with policy commitments, the
numbers of contracts signed that include a supplier code of conduct. (...) I can't
do very much with those metrics in terms of gaining confidence that the
measures the business is taking are moving in the direction of better outcomes
for people.
Another interviewee from an international civil society organisation indicated:
Reporting is an important part of due diligence…but reporting needs to be done in
the context of a larger normative framework that obliges companies to do due
diligence effectively to put in measures in place to prevent harm…It’s the showing
what they’ve done. Showing the public in general what they have done to prevent
harms. So I think it is important but it cannot be and it will never be the way in
which you will tackle the problem, in the absence of everything else that is
needed.
One interviewee from civil society indicated:
One of the lessons from the UK Modern Slavery Act, is just reporting what you
have done does not take you very far. And that reporting needs to evolve to be
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around the effectiveness of what you have done, so that reporting is a lot more
reflective, rather than just you listing off well we’ve put in place a load of policies.
They further indicated that standardised performance indicators to measure
effectiveness would “evolve over time, rather than something that you could put in place
from the very beginning.”
In relations to child labour, an interviewee working for an international NGO indicated
that:
A side effect of interpreting due diligence obligations as meaning: 'Ok, I need to
monitor, I need to be able to account or report how many children are in my
supply chain', is that it came with an insane amount of money spent on very little
value added actions, and very little money spent on what can actually change life
of people which is remediation.
However, views on reporting requirements are not all negative. On the contrary, it was
highlighted by several interviewees that reporting requirements such as the EU non-
financial reporting directive have had a positive impact on the internal conversations
taking place within companies. One interviewee from a transnational company based in
Spain indicated as follows:
[The implementation of the EU non-financial reporting directive in Spain] has
really impacted in the company. For me, particularly, I could not be happier. We
have always felt the support of the company. But some other areas of the
company, they do understand when something happens, but they do not really
understand how far this is also affecting the rest of the business model. When
you wrote to your colleagues, and you talk about materiality analysis, when you
talk about GRI standards, when you talk about reporting, when you talk about
transparency, when you talk about traceability. They listen, but you take care of
it. And now the conversation is all over the company. I have people from other
departments: Can you come to my office and explain to me this thing about
materiality that you have been telling me for many years? Because we have
already been doing it, for me it’s being great, because now we have the back-up
of something as big as the European Union and all the lawyers are now behind it,
so it really helped. I have seen other departments in my company really going
crazy trying to get all the information that we need to report. Humbly, I had it in
five minutes. Because this is the data that I manage. I did not have to create
anything. They were asking how many factories do you have and I have it here
because I have a system and I just have to press one key. This is something that
is giving another level of visibility within the company. For me, these types of
laws, that even if they are only saying say what you are doing, are very relevant.
One interviewee working for a financial institution explained that the UK Modern Slavery
Act has had some effects in terms of bringing some "boardroom awareness, because
people have to put their signatures", but not as having affected corporate practice. A co-
interviewee working in the same institution explained that:
It provided the opportunity to put this on the agenda of the managing board. The
statement contains no new initiatives or information. It is only a summary of
what we were already doing within different roles of the bank, and specifically on
modern slavery. However, when we sent the memo and the draft statement to
the bank, I think they came back twice with some sort of requests for more
information about how certain procedures worked or why we chose certain
language. So it sparked some interest on the topic which was perhaps not there
before. But then again, as soon as it got approved that was it. There wasn't any
follow up or changes or increase in level of ambitions. We are quite ambitious,
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specifically on this issue, but it is not because of the Modern Slavery Act
requirements.
A company interviewee also highlighted the role of the UK Modern Slavery requirement
in providing the language for companies to speak about their impacts:
It made us more comparable within brands, because we could be speaking about
different things, and they were true and they were relevant, but if you use the
data in another way or another you may sell what you are doing in a different
way. But with the [UK Modern Slavery Act] you were comparing potatoes with
potatoes. I mean that’s what it was. How far have you gone in your traceability,
how many tiers do you know?
Option 4: Regulation requiring mandatory due diligence as a standard of 5.4
care
Survey respondents were asked several questions about the impacts and effectiveness of
a regulatory option of mandatory due diligence and its various sub-options (set out in
the Problem Analysis and Regulatory Review section).
A large majority (65.59%) of business survey respondents indicated that new mandatory
due diligence regulation is likely to have social impacts. Only 11.76% disagreed.
Regarding environmental impacts, 52.94% of business respondents believed that
mandatory due diligence regulation would have impacts on the environment. Moreover,
more than two-thirds (67.65%) of business respondents believed that mandatory due
diligence would have impacts on human rights. Only 9.8% of business respondents
believed that it would not have human rights impacts.
General respondents were even more convinced of the likely impacts of mandatory due
diligence requirements. The vast majority (86.39%) indicated that it would have social
impacts, contrasted with only 4.08% who disagreed. Again, 81.63% indicated that it
would have environmental impacts, and only 4.76% indicated that this is unlikely.
Similarly, 86.39% of general respondents believed that mandatory due diligence
requirements would have human rights impacts, and only 3.4% believed that this is
unlikely.
The majority of the stakeholders interviewed supported the introduction of a general
requirement at EU level which would require companies to undertake mandatory due
diligence in their own operations and throughout their supply chains. However,
interviewees differed with respect to liability and the enforcement method for
implementation.
One interviewee from civil society which specializes in corporate accountability across
sectors indicated that this kind of regulation “would be a massive step forward, and if
adequately crafted it has the potential to make a huge difference.” Similarly, a survey
respondent from a trade union organisation indicated:
An effective and ambitious European legislative framework obliging companies to
establish due diligence mechanisms for their supply chains is a conditio sine qua
non to enhance European companies’ sustainability and ensure fair competition in
the internal market.
One interviewee from a multinational company explained the reasoning behind many
multinational companies’ support for a due diligence regulation:
Those benefits would be first and foremost a level-playing field. Having everyone
play by the same rules, to reduce complexity and bring some clarity. And, related
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to the level-playing field, and maybe the most important reason, is that it would
help to drive mainstreaming good practices. Which is important for the sake of
our planet and people in our supply chains. But also, more selfishly, because
when we're working on a particular issue, when we don’t have all the actors along
the supply chain at the table caring as much as we do, it's much harder to get to
the root of the problem. So you need not just the consumer-facing companies
and those who get NGOs campaigns pushing them to do certain things, but you
need all the actors along the supply chain to also have good reasons to pay
attention and to put the resources towards solving those issues.
An interviewee from a multinational food and drinks company indicated:
As a company we believe that legislation can give the right incentives for
companies to address their human rights so as a principle we would welcome a
legislation, potentially one that is covering the entire EU would most probably be
preferable than having a patchwork of legislations with different kind of criteria or
addressing different kind of issues which is also an issue. But of course, this
legislation should really create an enabling environment, and not only focus
[either] on a tick-box exercise or on punishment of companies.
Confirming this reasoning by large businesses, one interviewee from an international
trade association which advises companies on their due diligence indicated:
I think a single harmonized, legal standard could be very valuable. I think the
businesses we work with would genuinely value that if the legislation of the policy
is intelligent. Most businesses we work with are already doing significant amounts
of human rights due diligence.
An interviewee from the European Confederation of Directors Institutes (“EcoDa”),
similarly confirmed the importance of a basic requirement of care:
It is fair to say that at Board level these topics are mentioned, and are discussed.
The important point is to ensure that these topics, whether it is supply chain,
corruption, labour force, human rights, that they are mentioned and tabled on the
agenda. So that the Board can say with the executives concerned: Is it a problem
in our company? Do we have a policy for it? How to apply our policy? And how far
do we go into the reporting, and how frequently? And it can take five minutes in
one company; it can take five hours in another.
In turn, civil society stakeholders expressed the view that it is essential for the
regulatory mechanism to create remedies for those who are affected:
In terms of saying what we would like it to look like: A requirement to carry out
due diligence in accordance with the Guiding Principles and then enabling
provisions that allow people who are adversely affected to hold the European
parent companies to account in the home jurisdiction of the parent company.
An interviewee working for a French business organisation indicated that the French
Duty of Vigilance Law had already had positive impacts on business practices:
It forced enterprises to reexamine their current HR practices, and to systematize,
formalize and integrate them for all of their activities.
Many companies know their salient human rights issues because they have been
challenged by external stakeholders and have to respond to extra-financial
agency questionnaires. But perhaps they had not addressed all human rights
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issues. Now they have to and they have to prove it, for all the companies and all
the subsidiaries in the supply chains.
The interviewee added:
Around 50% of large companies concerned by the law have a dedicated approach
regarding human rights. The other ones only refer to ethical principles or human
rights policies (...) but they don't identify their most salient human rights issues
so it's not a proper response.
Before the law, only perhaps 20% had this kind of dedicated human rights
approach and it was the companies the most challenged by stakeholders because
of their sector, country or activity, etc. (...) The law helped some companies to
systematized and formalized a dedicated human rights approach at corporate
level and integrate it into global processes.
5.4.1 A standard of care rather than a process
Interviewees also highlighted the importance of the use of a standard of care
requirement (rather than due diligence as a mere process) as it would require companies
to do whatever is required to prevent and mitigate human rights risks, rather than
simply create “tick-box” processes.
One company interviewee indicated that it is better to have a regulation for which “you
have to show the result and not so much the process”:
Due diligence is a very complex process. I have done a lot of survey and
questionnaires for NGOs on due diligence, and sometimes I get really upset.
Because I can understand that they get fixated on process. But I may not have
artificial big processes with A B C, but I have the results, I have the reality of the
supply chain. So how do you differentiate it when you create a due diligence
regulation between those people who have created and empty process and those
people who may not have super structured formal process, of this goes here and
this goes there, but there is actually a lot of information…. When you are really
doing things and you do not want to hide, you want questions that can actually
show how you are managing your impacts. Not how good you are at creating big
processes with arrows.
Concerns were also raised about due diligence being understood as a “tick-box” process.
For example, an interviewee from a financial institution indicated:
The benefit of legislation is that it is easier to put on the agenda of the managing
board. It allows you to get more capacity internally. In the financial sector
regulations, there are tons of people working on implementing that, and
significantly less on the human rights or environmental due diligence part. So
mandatory legislation may free up more capacity within companies.
However, the type of people that would be placed into such a job could be made
part of the compliance departments, which are interested in complying with the
law and nothing more than that. While the people who are usually staffing
sustainability departments are in it for different reasons. So they are not merely
interested in complying with specific mandatory standards, but are also interested
in positive change proactively addressing human rights issues, seeing different
connections between initiatives, speaking out on certain issues. And that's not the
type of work that compliance do. So if mandatory legislation would shift this
whole field towards compliance teams internally, it creates different dynamics
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within companies. And that's what you could be afraid of, in a sense, as a result
of legislation.
Similarly, another company interviewee indicated that:
We do have a different scheme than my colleagues from the legal compliance
department. We do put workers at the centre. I want to make lives of the
workers better, and of course I want to do that by avoiding risks to my company.
… But if the only thing that the regulation is telling me is: ‘What is your process
for due diligence?’ I mean how is the right-holder improving their lives with that?
How does it matter if I am meeting with the legal department three times per
week to tick some notes? … We should be able to see the whole picture of
impacts and then focus on what you find most salient, but [the regulation should
focus on] what have you done, what is the final change in the lives of those
rights-holders because of your due diligence processes.
An interviewee from a French business organisation indicated:
A huge challenge today is not to interpret the [French] law in a strictly compliant
manner ... but really to understand the law through a continuous improvement
approach. And the spirit of the law is the UNGPs and CSR frameworks.
An interviewee working for a French business organisation indicated that the French
Duty of Vigilance Law explained that:
The question of internal actors to implement the law is very crucial (...) There are
many different perceptions and understanding of what are the objectives of the
law between different internal departments. All departments have to be involved
in the implementation of the law because there are human rights issues,
environmental issues, health and safety issues and it's not the same internal
departments which address all the issues. It [the law] asks for risk-mapping so
risk officers have to be involved, there is also monitoring so internal control and
audit are involved, and its a law so legal and compliance departments are
involved too. We really see a need to have a shared understanding, a shared
vision of the law and the objectives of the law. Except for CSR departments, it's
very difficult for other departments to understand that the risks to consider are
not to companies and the objective [of the law] is not to protect companies but
it's only to protect people and the environment
An interviewee who works with businesses in the implementation of the UNGPs stated
that:
What we're always really interested in is how to you drive meaningful behaviour
change by business that goes beyond superficial compliance and that goes
beyond treating this as: ‘Now you've just made human rights another tick-box
exercise which we'll treat through templates that law firms will sell to us’ and so
on and so forth.
5.4.1 A general, context-specific standard
Many stakeholders, including all interviewees, emphasized that the standard of care
should be general and flexible so as to take into account the specific context of each
specific company. This is consistent with the UNGPs which state that due diligence “[w]ill
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vary in complexity with the size of the business enterprise, the risk of severe human
rights impacts, and the nature and context of its operations.”320
For example, an interviewee from a multinational food and drinks company who
advocated for the regulation to be based on the concept of due diligence contained in the
UNGPs explained:
[T]he amount of due diligence and the level of due diligence that each company
will carry out will be different, based on its size, its structure, its business
relationships, the risks that it faces. And I don’t know how easy / difficult it is for
a law to recognise that [in a law]. But this level of flexibility is really essential if
we really want to make sure that our suppliers, and you know, some of them are
big but a lot of them are really small, can also actually participate in this effort to
carry out due diligence and improve things. Because the risks that we face are
mainly with these small-size enterprises, and actually to a very large extent, with
… farmers themselves … I think this flexibility within the law that we have in the
Guiding Principles, it will be great actually to see it in a law at the European level.
The interviewee added that this flexibility provided by the concept of due diligence in the
UNGPs also means that a general cross-sectoral mechanism could be applied to all
sectors and sizes of companies, as the due diligence test will be for a contextual risk-
based approach:
If the law is flexible enough towards the risk of exposure to business, then we
would not actually need sector-specific laws. For example, in our industry we
know that the main risks that we face are in the upstream supply chain. So if
there is a way for the regulations to [point out] that companies need to actually
look at where the risks are, I think you would not need such sector-specific
legislation. Because the risk would be different for each sector and each
company, but then … that would be the responsibility of [each] company to
assess and identify these risks, be they in the upstream supply chain, or be they
in the mine, or on a specific site, or in the downstream supply chain, it does not
really matter.
A survey respondent from an international industry organisation explained in an optional
text box:
There can be a delicate balance between competing objectives regarding human
rights, environment and climate change. Companies frequently face difficult
choices while pursuing different objectives. For example, a catering company
operating worldwide may want to reduce CO² emissions due to transport of food
and consequently decide to source food locally. However, local food production
may involve farmers whose children participate in the local food production. This
is a typical dilemma which companies would not face if local governments applied
minimum environmental, social and human rights standards.
An interviewee from a business membership organisation said:
There is a need for a tailor-made approach, not a one size fits all approach,
especially if it is mandatory. Because corporations are so widely different in size,
in activities, in history – some are brand new, some are 200 years old – in
international position, that thinking that all companies, let’s say apart from the
very small ones, can apply the same practices and same information, and the
same rules is an illusion. It’s easy on paper, but it is an illusion.
320 UNGP 17(b).
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One interviewee from a civil society organisation explained:
I think it’s a really interesting approach. Because what I see also is there are some
really obvious cases. Like I went to a conference [and] there was an indigenous
woman from Alaska … and she was saying people were killed because they were
complaining about their land being taken by oil companies … It was so obvious, and
on that I’m like: ‘Can’t we have a law to prevent that?’. But as soon as you discuss a
law for these obvious cases, then all the really complicated cases come up and
people say: ‘Oh, we can’t do it because there are some complicated cases.’
So I think the approach [that] is so general, and would allow for context-specific
things, that would allow taking to court those companies that really do gross, direct
human rights violations, and at the same time have some room to take [into
account] the circumstances for other companies that are not so directly involved,
where the issue is more complex. I think that is a really good approach. We can’t
wait and not do anything about the obvious cases just because there are really
complex cases.
For example, on child labour in the cocoa sector, it’s really complex. The companies,
they don’t employ children directly. There are different intermediaries, there is a
poverty issue, there is a cultural issue, there is a lack of alternative economic
possibilities, I mean, there are so many other factors that you can’t really hold a
company liable directly. They have to play their own part, but it’s really complex. We
can’t not have a law because of these complex cases and then let the other continue
violating human rights.
These arguments also tie in with the views of stakeholders relating to due diligence as a
defence, which is discussed in the following subsection.
5.4.2 On due diligence as a defence
Stakeholders across the spectrum highlighted that companies should be able to escape
liability if they are able to demonstrate that they have, in fact, undertaken the due
diligence required in the circumstances.
As is noted in the Problem Analysis and Regulatory Options section, a legal standard of
care which is not a strict or absolute liability (or “no fault” liability) would imply that
there would be a defence available to companies to show that they have undertaken the
required level of due diligence. There are various examples of where due diligence is
used as a defence in current laws or legal proposals, discussed in more detail in the
Regulatory Review. Examples include the UK Bribery Act 2010321 and the Swiss
Responsible Business Initiative and counter-proposal.322 For further elaboration on the
test which the due diligence defence could take (for example, “adequate” due diligence,
“reasonable” due diligence, and so forth), see Problem Analysis and Regulatory Options.
One interviewee who works with businesses in the implementation of the UNGPs
indicated that:
In the text of the UNGPs, it is clear that conducting [due diligence] should not be
an automatic defence. And I think that it's this issue of automaticity that is the
321 Section 7(3) of the UK Bribery Act 2010 provides a defence to corporate criminal liability if companies can prove that they
had in place "adequate procedures" designed to prevent associated persons to engage in bribery. 322 Article 2(c) of the Swiss Popular Initiative on Responsible Business provides that parent companies are not liable if they can
prove that they took all due care to avoid the loss or damage, or that the damage would have occurred even if all due care had
been taken. Nicolas Bueno, “The Swiss Popular Initiative on Responsible Business: From Responsibility to Liability”, in Liesbeth
Enneking et al (eds.), Accountability, International Business Operations, and the Law, London: Routledge (2020), 239.
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problem. And "safe harbour" implies "I do this, snap, I'm free, whatever happens
I'm out". And I think that's the issue that then causes an understandably
negative reaction from civil society and others, and a lot of concerns.
What we certainly think is reasonable is that in any consideration of liability, the
adequacy, the appropriateness of the due diligence that they conducted would be
taken into account. That's integral in actually making decisions under the UNGPs
about whether a company contributed or not…The adequacy of their due diligence
measures helps place them on a spectrum between contribution and linkage.
However, in accordance with the UNGPs, conducting due diligence would not create a
"safe harbour" or a “tick-box exercise” whereby companies are automatically absolved
from liability. In particular, the commentary to Guiding Principle 17 notes that:
Conducting appropriate human rights due diligence should help business
enterprises address the risk of legal claims against them by showing that they
took every reasonable step to avoid involvement with an alleged human right
abuse. However, business enterprises conducting such due diligence should not
assume that, by itself, this will automatically and fully absolve them from liability
for causing or contributing to human rights abuses.
An interviewee from civil society indicated:
In this debate, the concept of “safe harbour” is not a very helpful concept,
because it is mixing things together. From our perspective, we would want to say
to companies: It’s not in your interest not to report. Because if something does
emerge, if an issue emerges, or an allegation, it’s in your interests to show that
you are aware of it, you had identified it, you are dealing with it. And if for
whatever reason it had not been resolved, then you have got the information
there to say: “Well, we were trying to address it, this is as far as it had gone”,
whatever the circumstances were.
One interviewee who works with business on their supply chain due diligence highlighted
that the law is unlikely to create liability for those companies who are already
undertaking comprehensive due diligence. Instead, such a law may benefit such leading
businesses by raising the standard in operating contexts where individuals have not
been able to create change in their own:
Even these front running companies, who take this stuff very seriously, are going
far beyond. They would not be impacted by this legislation because they are
already doing the due diligence. They are not able to foster the conditions that
actual decent work and supply chains.
An interviewee from a multinational food and drinks company explained:
The sanctions [for non-compliance] should be smart enough… and building and
enabling environments to really incentivise companies to do the work properly
and seriously. So meaning not being afraid of disclosing anything.
If you [look] again into the UN Guiding Principles, there is the clear statement
that having a proper and serious human rights due diligence process in place
should help companies themselves in case they are trapped in a dispute. So in
some way conducting [due diligence], if it becomes mandatory, should help
companies to know and show their issues and to be safe of disclosing them. If it’s
again a way to blame and shame it will not be a good legislation.
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However, interviewees explained that a due diligence defence would not enable a
company to hide behind having had no knowledge of the specific impact or risk. An
interviewee from an international civil society organisation explained:
I would be looking at why were they not aware. That could be a failure in itself.
Can they possibly justify that they were not aware of that’s what they do, that’s
their business, that’s their market, what they’re there for? Why were they not
aware? … It may go to the concept of ‘due’ … but one of the things that we find is
that companies are not prepared to put [in] the money that is necessary to
become aware. So in that “reasonableness”, there is a lot of subjectivity in terms
of: ‘Ok, it is not reasonable to ask me to spend 10 million dollars to find out what
the risks are’, but from our perspective a big company, or even a small company
that wants to work in an inherently dangerous environment, has to be prepared
to put that amount of money.
It was also highlighted that in some areas of law, such as health and safety or product
liability, strict liability without a defence already exists. In these cases, a due diligence
defence should not apply as it would water down an existing stronger legal mechanism.
An interviewee from an international civil society organisation explained:
There are areas in which there is strict liability or objective liability already under
existing law, and there is no due diligence [defence]. And many of the areas that we
look at, for example mining, and other industries that work with inherently
dangerous products or substances or inherently dangerous environments…the
company has to respond to the damage regardless of any due diligence. And that
needs to be preserved. These discussions on due diligence should not now water
down existing absolute liability or strict liability…There is no due diligence [defence].
The due diligence is only to avoid the harm, but if the harm occurs the liability is
automatic.
5.4.3 On application to the supply chain
Interviewees expressed opinions about how regulation requiring mandatory due diligence
could be applied along the supply chain:
When it comes to liability around supply chain issues, to be frank, there are
differences in opinion as to what people want to see. Some people think: ‘Well,
really reasonably, can you hold someone responsible for something that happens
way way down the supply chain?’ I think, in theory, yes you can, because you
can say, ‘Well, you ought to have known what was going on’. I think the question
then comes up around resourcing. If you are a really small company, where does
that responsibility end? No-one is that sure of what that looks like.
Another interviewee with legal expertise on the development of the Swiss legal proposal
for mandatory due diligence, emphasized the importance of ensuring that the due
diligence does not simply allow companies to “force a supplier in the supply chain to sign
a contract” that the supplier will itself undertake due diligence. In this regard, they
indicated that it is important to base the due diligence requirement on the UNGPs,
including the “three steps approach” of “identifying, taking measures and take account”.
This “would clarify that it is not enough to simply make the suppliers sign the contract
that itself will conduct the due diligence” but that there are “different steps that needs to
be taken by the company”.
They added:
[T]here is absolutely no court decision on this, so we cannot now know for sure
how the first judge will decide a case about whether a company has applied its
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due diligence in practice or not. We do not yet know if the judge will interpret it in
restrictive way or in a broader way in accordance with the idea of the UNGPs.
This is a big question that has to be addressed. This why I would recommend for
legislation to be broad, but really to follow the idea of the UNGPs with regard to
due diligence. This will exclude the idea that due diligence is completed when
someone [in a supply chain] signs a document.”
They further explained how supply chains are regulated in existing mandatory due
diligence laws or proposals, as follows:
We have to distinguish two different things. Let’s start with the French law. It
establishes a vigilance obligation that applies to suppliers as long as they have an
established relationship with the company. The law limits the scope of liability in
the supply chain based on the relationship between the supplier and the
contractor: they have to have an established relationship. All others that do not
have established relationship are excluded.
In the Swiss constitutional initiative, we used another word: economic control.
You can be liable for the damage caused by suppliers over whom you have
economic control. This was precisely to include cases like the Kik case, in cases in
which you have a practical economic control.
These approaches in France and Switzerland both go in one direction on how to
limit liability in the supply chain, based on the relationship. Because we need a
limitation to some point.
The other option in the German [unofficial draft outline] … That does not look at
specific relationship between the supplier and buyer, but more generally at the
risk. This I find is correct in the idea, but more complicated. What is a big risk?
This will leave a very big margin of appreciation for a judge, which from a justice
perspective would be better, but for businesses would leave too much room and
uncertainty…
There must be some kind of test of adequacy. This is normal, this is the case
when you are applying general principles to a specific case. There will have to be
a test for adequacy, but this is not enough for the specific problem in the supply
chains, to say: ‘Okay, when do we establish liability when don’t we establish
liability?’. And this is what businesses want to know. Adequacy will not resolve
the problem, but the notion of a specific control or established relationship, they
will say ‘Okay, this is not an established relationship, I am outside of the scope of
the legislation’.
Company interviewees confirmed that it was important to understand the scope of the
supply chain for the purposes of extending a standard of care. It was emphasized that it
would accordingly be important for any mechanism to take into account the realities of
the supply chain in question.
One interviewee from an environmental NGO warned against the potential negative
unintended consequences of increased supply chain due diligence for smallholders:
One of the principles of due diligence is that in theory you're not supposed to just
abandon risky suppliers, you're supposed to continue engaging with them but I
don't know in practice how that works ... The cocoa sector is almost entirely
smallholders. If such a regulation resulted in an increased cost for them for
example, this would not be what we want, and also if it led to more small size
actors being shut out of the supply chain because it's easier to conduct due
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diligence with bigger actors then this would also be something that we would be
concerned by.
5.4.4 Company law and the duties of the Board
A few interviewees stressed the importance of introducing a regulatory standard within
the company law framework. A survey respondent from an industry organisation
indicated in an optional text box that one of the “key factors of success” for their
members’ due diligence has been:
Transversality and breaking of silos: a wide variety of actors in the company must
co-operate to set up and implement a plan, and then monitor and control it.
Accountability for CSR should be clearly assigned and approved at the most
senior level of the company.
The approach of introducing mandatory due diligence as part of the statutory duties of a
company is discussed in the Regulatory Review under the heading relating to oversight
and enforcement.
Beate Sjåfjell, corporate governance expert and project coordinator of the SMART
Project, explained this approach with reference to the Norwegian law relating to women
on Boards (which is discussed in Section 3 Regulatory Review):
Norway took what was then seen as a very radical step and introduced rules in its
public companies act, not just for listed companies but all public companies, that
they have to put a minimum of 40% of women on all boards. This has really
shocked my colleagues in the US and Australia, that the sanction would then be
that the company would not exist anymore if this was not followed up on. This is
taking it seriously as company law. If a general meeting says: Actually we do not
need a board, we can manage without a board, or if they have to have an
auditor, which the largest companies have to have, [and they say:] no we don’t
want to have an auditor, or we don’t feel like submitting our annual accounts this
year, then there would be very strong sanctions. And at the end of the day the
company would not be allowed to exist anymore. So what they did in Norway
with gender is that they took that as seriously as the rule that all boards for
public companies have to have at least three members.
So what we want to do is go a little bit further in that direction, and see if we
take this seriously, not as some kind of CSR add-on, but see it as sustainable
company law, sustainable corporate governance, what is then the best way to
enforce this kind of requirement.
An important feature of the corporate law approach is that it engages the responsibilities
of the Board. One company interviewee indicated that it is important to get the
“involvement of the Board of directors”:
It has to go together with the annual accounts and the responsibility of the
liability of Board of directors. And then everybody starts to get nervous. And I
think it’s positive, let’s get them nervous so they will act.
Another interviewee from a multinational company stated:
Board members have personal liability in most constructions of companies. I
think that's mostly about financial data, it's not about responsible behaviour. So
that could also be one of the angles to get the responsibility in the boardroom.
What are the incentives used within companies? What is the incentive structure?
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5.4.5 On cost
The costs and benefits analysis is set out in detail in the assessment of the regulatory
options below.
However, certain comments made during interviews were particularly relevant for the
consideration of stakeholders’ views on the regulatory options. In particular, many
interviewees within companies indicated that they would not foresee any additional
costs, as they are already addressing these risks.
For example, one interviewee from a multinational company indicated:
For us it wouldn't be an additional cost in the sense that we're already doing
human rights and environmental due diligence…We have a lot to gain by making
sure that everyone else is also doing this.
Moreover, interviewees indicated that a lack of undertaking due diligence is a greater
financial risk to the company. Another interviewee from a multinational company
indicated:
What is costly, in my opinion, is not to do it. That is what is costly and that is
what companies should understand.
The interviewee further indicated that any regulation should apply to all companies
regardless of size because “it’s only expensive when the responsibility falls on a limited
number.”
A survey respondent from a trade union association have also highlighted the
importance not to take only into consideration additional costs for companies in case of
regulatory actions at European level, but also to “take into consideration the costs
caused to society by operations of corporations and their contractors in the supply chain
which violate human rights and social rights and damage the environment”. They added
the importance to “take into consideration the potential improvement in companies’
sustainability linked to the introduction of new rules on supply chains due diligence”.
Any analysis should therefore consider the costs and the negative impact of
human rights violations in companies’ supply chains in the current situation, as
well as the negative environmental and social outputs.
They also underlined the importance of taking into consideration the possible benefits for
society of a European initiative which would ensure that operations of corporations and
their contractors in the supply chain respect human rights, social rights and the
environment.
5.4.6 A “smart mix” of measures
Many stakeholders indicated that mandatory due diligence fits in with the “smart mix” of
measures which is required to affect real change.
The origin of the concept of a smart mix in this context is the Commentary to UNGP 3:
States should not assume that businesses invariably prefer, or benefit from, State
inaction, and they should consider a smart mix of measures – national and
international, mandatory and voluntary – to foster business respect for human rights.
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Marilyn Croser, Director of CORE, who is leading the campaign for mandatory human
rights and environmental due diligence in the UK, describes how mandatory due
diligence fits in with the smart mix as follows:323
While mHRDD and parent company liability is not the sole solution to a range of
problematic corporate behaviours, it is a key part of the effort to make corporates
accountable and to shift to more responsible business models.
An interviewee from an international network of NGOs which promotes corporate
accountability with a particular focus on the OECD Guidelines explained that:
In general, thinking of policy coherence, and clearer coherent messages around
due diligence from governments to businesses, I think that certainly
experimenting or moving towards a 'smarter mix' of voluntary and binding
elements coming up from governments is going to be necessary.
For instance, in relation to deforestation, an interviewee working from an environmental
NGO indicated that:
Even if the company is trying to the best of its ability to stop deforestation, there
are many drivers of deforestation that are not within its control. And in particular,
what's often left out of these voluntary approaches is the role of the government
in a producer country. And so, for example when there is a situation where the
way that tenure rights over lands or trees are allocated is driving deforestation,
so in Ghana and Côte d'Ivoire for example, the government owns the trees, not
the farmers. And this ends up becoming a big incentive for deforestation ... This
is an issue that companies cannot resolve, governments need to resolve that. But
because so much of the conversation has focused around voluntary company
commitments, we have completely lost sight of the role of producer-country
governments and legal enforcement. A lot of these activities are not in line with
international human rights law but they are not even in line with the law of the
producer country...
That's why what we're advocating for is a due diligence regulation, but also
accompanied by much stronger support and processes in producer countries to
improve legal enforcement. Because that brings back into the limelight a very
important actor into this whole situation. And does not focus only on the supply
chain, which is not going to fix a lot of the broader issues, including for example
poor land use planning and uncoordinated land use planning between different
ministries, which is a big driver of deforestation as well.
In relation to child labour, an interviewee who works in an international NGO indicated
that:
In the smallholder context, and if you look at child labour, child labour really is a
symptom … There needs to be an acknowledgment that having impacts cannot be
achieved through addressing a symptom. And I think that is where we need to
define a context, so that the actors feel comfortable in taking a different
approach, and not be measured by the numbers of what they report on. So [it
requires] shared responsibility, coordination of actors, identifying stakeholders to
engage with, helping to improve government systems and structures …That
needs to be something that needs to be really spelt out so that they know that it
is something that is required of them … And I think this is the challenge that we
323 Marilyn Croser, “Towards mandatory human rights due diligence in the UK: Developments and opportunities”, BHRRC (3
June 2019), available at: https://www.business-humanrights.org/en/towards-mandatory-human-rights-due-diligence-in-the-
uk-developments-and-opportunities.
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are currently having. It is always like: ‘Oh no, this is not our responsibility, this is
the duty of the government.’… But in this context, you really need to redirect
your actions to help putting the required systems in place.
Another interviewee from the same organisation added:
It is fair to try to establish some degree of responsibility on companies’ side. But
it would be very important almost to mandate to them to work in close
cooperation with either development actors or national actors and civil society on
the ground, to ensure that any effort in not happening in isolation, is not a
duplication of work, or is not even in competition with what other actors are
doing. And most of the time, a company is not necessarily as well placed as an
international organisation to work in a way which is organic with the existing
National Action Plan for instance.
One interviewee from a company which has a dedicated supply chain due diligence focus
indicated that:
On the one hand, due diligence is important to spread that awareness throughout
supply chains. But it does not necessarily solve the issue that is the main
problem, which sometimes requires quite some investment, engagement, market
access against specific terms and a lot of external assistance … Legislation is one
of the tools that can be used to do that, but you need all these different tools to
be in place to actually address the issues.
The interviewee added:
To be able to actually have a positive impact and social and environmental
concerns throughout the supply chains, you need mechanisms in place. Also,
maybe reward and maybe even push companies to report on the impacts you
have made, and say you will actually be evaluated on whether you have actually
improved environmental performance somewhere, or whether you have increased
incomes somewhere…
One interviewee who works with businesses in the implementation of the UNGPs
indicated the need for a package of measures, whereby the EU Member States, as home
states to transnational companies, need to commit to put in place certain measures. The
interviewee indicated that such measures could include making available the Member
States’ foreign diplomacy support and their trade missions, in order to support the
expectation that business should undertake due diligence.
Several interviewees suggested that it would contribute to policy coherence if mandatory
due diligence could be tied to trade incentives and conditions in trade agreements. For
example, an interviewee who works with businesses in the implementation of the UNGPs
indicated:
That's a really important element to consider in any proposal that would come from
the Commission level which is, we're not just saying to member States you should
adapt your regulations so that they include this requirement, whether it's reporting
or something that is more comprehensive due diligence expectations, but it has to
have some guidance as to what kind of implementation machinery needs to sit
around that. Whether it's the State also using its own economic power to set
incentives for business through procurement, but also through what State-based
financial institutions are required to do. Is the Development Finance Institution
considering this? Is the Export Credit Agency considering this? So getting States to
see that there is an array of policy measures that would be necessary to sit around
any type of legislation.
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And I think that that is still true when you come to the more comprehensive
mandatory [due diligence] approaches like the Swiss or the French because at the
end of the day, liability under those regimes will be restricted to a smaller group of
entities or to impacts happening in connection with a smaller group of entities in the
value chain. It's kind of impossible to imagine it otherwise under any current system
of liability in those major jurisdictions. So if that is the case, how is the State going
to, at the same time, send the message to business: ‘But we're serious, we want you
to still think about the whole value chain’. We know that you are going to expand
energy on the narrow group of entities, whether it's the narrower definition in the
Swiss proposal or the slightly more expansive definition in the French devoir de
vigilance law, but it's still a subset of all the business relationships that [due
diligence] is really asking companies to look at.
So I think that remains a very important question and it ties also to the European
Commission' sustainable finance agenda because the expectations of investors, for
example, particularly large State investors - public pension funds and so forth - is
going to be one very good way to continue to send a signal to business: ‘Now we're
worried about the whole thing. You might be liable for this subsection, but we're
looking at your performance across this whole terrain of relationships’.
Another interviewee from an international civil society organisation suggested that EU
Member States’ support for and encouragement of improved conditions and law
enforcement in host states would be a natural complement to an EU-level mandatory
due diligence law, as follows:
It needs to be a package of measures that could include also market access
regulation. It needs to include definitely also measures in the producer country.
There needs to be law enforcement in the producer country as well. And for that
also maybe EU support to the partner countries so that they have enough
resources to enforce the law in their own country… It’s both an import regulation
… and at the same time there is bilateral agreements, there is due diligence and
so on…
If we only put due diligence regulation, the companies will say: ‘Yeah, but it’s not
my fault, I am buying, but in that country the law is not enforcement, minimum
wages are not enforced, child labour law is not enforced. It’s not my job to
actually enforce the law.’ So I think it needs to be really combined … It is often
production in very poor countries where the governments have very limited
capacities … but the idea to combine a market incentive with the due diligence
aspect…
I think we really need a package of complimentary measures. Just one puts
pressure just really on one actor, and then it doesn’t really fit together…because
[producer countries] also tend to say: ‘Yeah, why are you telling us what to do in
our country, when your companies are coming and exploiting our people’. So if
you say: ‘Yeah, but they have due diligence [legal requirements in the EU], then
please do something yourself’, so that all the stakeholders involved have their
part to play. Otherwise they keep throwing the ball at each other and saying: ‘It’s
not my fault, it’s their fault.’
One interviewee from an environmental NGO indicated that:
For us it is also important ... going beyond legality of the country of origin…
Especially when we talk about deforestation, just to give you an example, in
Brazil about 88 million hectares of land can still be deforested legally under the
current Forest Code ... Also you need to make a differentiation, and it's also what
we have experienced with companies, what's written on paper is not necessarily
the reality on the ground … So you might have very good laws on the ground, but
the implementation is a big failure. So for us governance is a big issue.
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One interviewee who works with companies on their due diligence practices referred to
the importance of schemes such as the EU Generalised Scheme of Preferences (“GSP”):
A lot of companies we work with import into the EU under this trade scheme [the
EU GSP], and it's a real driver of economic growth in certain developing
countries. And it’s usually valuable to European companies and consumers
because they benefit from cheaper goods. I think it's important to highlight these
trade schemes and the global trading system more generally, because I think
greater harmonization is needed between this agenda and the agenda of the WTO
or the European Commission's Trade DG. We need to be talking with one voice
here, human rights due diligence is a political issue, an economic issue, it's not
just human rights. We want to focus on inclusive economic growth, not just
applying another layer of regulation that means the company [would] have to
report … I just wanted to highlight the importance of these trade programs and
the importance of trying to ensure that whatever legislation is done is interlinked
with these trade programs. And [that] it's at the very least consistent with, and
supportive of those trade programs’ aims, which is inclusive economic growth in
emerging markets economies.
In an informal interview, Professor Olga Martin-Ortega, who has worked extensively on
public procurement and human rights,324
also emphasised the importance of extending
due diligence requirements to public buyers in their public procurement activities. She
highlighted that this is approach is in line Guiding Principle 6 which provides that “States
should promote respect for human rights by business enterprises with which they
conduct commercial translations”, and its Commentary which elaborates that such
commercial transactions include their procurement activities, and added:
If you incorporate the public procurement part [into a mandatory human rights
due diligence legislation], what you are doing is creating an obligation on public
buyers to exercise due diligence … [So] you are actually creating a larger demand
for products that have undergone a human rights due diligence process and with
a supply chain that has due diligence … It is the next step up in ensuring that the
whole chain is covered by the due diligence requirement, it is just that the end
purchaser is not the brand, the end purchaser is the public buyer. This is
essential for States to comply with their own duties to protect human rights. We
cannot be demanding something of companies which we are not implementing on
our own purchasing processes. There is a flagrant lack of policy coherence in this
regard.
In an interview, Beate Sjåfjell, corporate governance expert and project coordinator of
the Sustainable Market Actors for Responsible Trade Project (SMART) funded by the EU’s
Horizon 2020, indicated:
It is so exciting now that this push is coming from two different directions. So you
have Action 10 of the Sustainable Finance Action Plan, which opens up for the
first time...in an EU context ... for integrating sustainability into the duties of the
Board. That is so important. And then from the other direction the call for
mandatory due diligence for human rights. But this needs to be combined in my
opinion.
324 Olga Martin-Ortega and Claire Methven O’Brien (eds), Public Procurement and Human Rights: Opportunities, Risks and
Dilemmas for the State as Buyer (Edward Elgar, 2019); Olga Martin-Ortega and Claire Methven O’Brien “Advancing Respect for
Labour Rights Globally through Public Procurement”, 5(4) Politics and Governance (2017), available at:
https://www.cogitatiopress.com/politicsandgovernance/article/view/1073/0; United Nations Office for Project Services
(“UNOPS”), “The SDGs, human rights and procurement: an urgent need for policy coherence”, in High Impact Procurement:
Supporting Sustainable Development (2017), available at: https://content.unops.org/publications/ASR/ASR-supplement-
2016_EN.pdf?mtime=20171214185155.
120
In the same way as the NFRD has not been able to realise its full potential
because it has not engaged properly with company law and the duties of the
Board; in the same way if due diligence for human rights is just placed somehow
into legislation without proper consideration and reform of the description of the
duties of the Board, and preferably also the purpose of the company, but
definitely the duties of the Board, then we risk that it just becomes another box-
ticking exercise. But if we use this opportunity so that we can also clarify the
duties of the Board…
But because of the dire situation that humanity is in, we need to do more than
clarify that 'okay in boards you are actually allowed to do this'. We need to
include in some way a mandate that they shape their business models in a way
that will promote sustainability. So that we can get a race to the top, instead of
to the bottom as we have now. We need to get some kind of floor in. And we
need to also do that in a way that does not just focus on the single legal entity.
Which is of course why this call for due diligence of human rights has come.
5.4.7 Transitional period
Several stakeholders suggested that there would need to be a transitional period for any
regulation. Similarly, in its May 2018 Report on Sustainable Finance, the European
Parliament, which forms the background to the mandate of this study, “[c]alls on the
Commission” to provide a “legislative proposal” for “an overarching, mandatory due
diligence framework including a duty of care to be fully phased-in within a transitional
period and taking into account the proportionality principle”.325
A survey respondent from a large cross-sectoral industry organisation explained in an
optional text box:
[M]anaging risks through global supply chains is so complex that it cannot be
tackled in a snap because it involves a great number of actors at different stages.
It takes several years to carry out risk analysis and put in place the appropriate
procedures, which can still never guarantee a “zero risk” supply chain.
An interviewee from a civil society organisation was of the following view:
When we think about due diligence, we need to recognise, albeit somewhat
reluctantly, that companies, most of them, do not have a clue. And they are
going to need really simple, ABCD, this is what you need to do. Certainly at first,
I think it would take about five years before things start to move and people get
an understanding of it.
Similarly, an interviewee from a civil society organisation in Poland explained that
"companies in Poland are at the very beginning of understanding that their responsibility
go to the supply chain". The interviewee highlighted that, although having hard law on
these issues at the EU level would be "the only solution", it would be nonetheless be "a
very big jump for Polish companies". The interviewee indicated:
If we want to see any effect, the regulation should be binding. However, knowing
that it won’t be easy to implement it in the right way from the beginning, I do
think that companies should have a bit of time to get used to it. Perhaps the
regulation could be introduced in a voluntary format for the first two years, for
companies to understand and train people, and already knowing that it won’t be
325 European Parliament Report on Sustainable Finance, 2018/2007(INI), at para 6.
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voluntary forever. Then on the third year, monitoring or verifying could start, and
maybe penalties should apply for companies that are found not to take action
accordingly. Indeed in Poland a majority of businesses are SMEs and these do
need more time because they are small and do not have dedicated staff.
A number of interviewees suggested the idea of a staged approach. One interviewee who
works with businesses in the implementation of the UNGPs stated:
I could imagine that you would move from … an initial period where we make clear
that this applies to everybody, including those EU member States who have not done
anything on this agenda yet. We're going to give them voluntary guidance to indicate
that this is real, and we're serious about it and it's coming. Then there's going to be
a period when we expect better disclosure and we start to evaluate, and companies
would get critical feedback from that. And that's where the connection to the investor
piece becomes so important, because if you're activating investors saying: ‘You have
to ask companies about it, you have to look at what they're producing’, then you
start to get a feedback loop. And then we are going to introduce an expectation that
includes the introduction of liability at national level.
The French Duty of Vigilance Law provided for a transitional period before legal action
could take place.326 An interviewee from an international trade association which works
with companies on their due diligence noted, with respect to the French Duty of Vigilance
Law, that legal standards need to be given content over time:
[Y]ou might require a few test cases to set some precedence to look through
them in the court, to help flash at what standards are required.
It is also noted that the France Country Report states:
As remarked by Dominique Potier in a recent conference to mark the second
anniversary of the Vigilance Law, to date we are still in a "learning phase" [phase
d'apprentissage], where the objective is not to sanction immediately companies
that are making efforts to comply with the Vigilance Law.
For this same reason, however, a transitional period may lead to a certain amount of
legal uncertainty while stakeholders wait to find out how the law will be applied in
practice. An interviewee mentioned that the transitional period applicable in the French
Duty of Vigilance Law meant that companies have not yet had the benefit court
judgments to provide clarity on how it will be applied. Guidance on the application of the
French Duty of Vigilance law indicates that the first reports “are of a lightness that
contrasts with the importance of the stakes of the Law on the Duty of Vigilance”.327
Sub-options of Option 4 5.5
5.5.1 Cross-sectoral v sector-specific regulation
Survey respondents were asked about their views on the perceived potential
effectiveness and impacts of different sub-options of mandatory due diligence. It should
be noted, however, that these perceptions of preferences should be interpreted with
caution. The regulatory options presented to stakeholders are framed within a complex
and developing area of law, and there are very few existing examples to draw on. Even
within the same stakeholder group (such as industry organisations) or within the same
326 Art 4 of the French Duty of Vigilance Law provides that legal action can take place only after the submission of the reports
for the 2018 financial year (after the law came into effect in 2017). 327 Sherpa, “Vigilance Plans Reference Guidance, First Edition”, available at: https://www.asso-sherpa.org/wp-
content/uploads/2019/02/Sherpa_VPRG_EN_WEB-VF-compressed.pdf, at 10.
122
company (depending on the respondents’ department) the views may differ widely. As
such, it is not likely that any single meaningful stakeholder preference of one regulatory
option over another can be concluded in general. The following should be read bearing in
mind these limitations.
Business survey respondents had a marginal preference (25.49%) for “[i]ndustry-
specific regulation, tailored for your company's sector only and applying only to
companies operating within this sector.” This was followed very closely (24.51%, in
other words only a 0.98% difference) by a preference for “[c]ross-sectoral regulation,
applying to all companies regardless of size or sector.”
The selection was equally close amongst business respondents with 1000 or more
employees, 25.97% of which (20 respondents) preferred industry-specific regulation,
and 24.68% of which (19 respondents) preferred cross-sectoral regulation applying to all
companies regardless of size or sector.
Amongst medium-sized companies with 50 to 249 employees, the top preference
(36.36%) was cross-sectoral regulation applying to all companies regardless of size or
sector. The second choice (27.27%) was cross-sectoral regulation, applying to
companies of a certain size regardless of their sector.328 The main exceptions to the
overall trend329 were amongst micro respondents, of which 75% had no preference, and
respondents with 500 to 1000 employees, where from a small sample of six respondents
to this question, three (50%) preferred industry-specific regulation, and one each
respectively cross-sectoral but limited by size, “both industry-specific and cross-sectoral
regulation” and no preference.
Below these two choices (at 19.61% of all business respondents), the third most-
preferred option by business respondents was “cross-sectoral regulation, applying to
companies of a certain size regardless of their sector.” These survey respondents
accordingly have a preference for cross-sectoral regulation, but with limited application
to companies of a certain size only.
If one adds up the responses of those business survey respondents who prefer cross-
sectoral regulation (but disagree on application to size of company), the preference for
cross-sectoral regulation outweighs the preference for sector-specific regulation: 24.51%
of business respondents (cross-sectoral regardless of size) plus 19.61% (cross-sectoral
applying to companies of a certain size) equals 44.12% of business respondents who
prefer cross-sectoral regulation, contrasted with 25.49% which prefers industry-specific
regulation.
Several business respondents who selected “[b]oth industry-specific and cross-sectoral
options have their benefits”,330 commented to the effect that the standard should apply
to all sectors, but should take into consideration the specifics of the sector in its
implementation. For example, some of the comments from these survey respondents
include:
“Regulation would have to be tailored by industry, but it should cover all sectors.”
328 This was followed by both industry-specific regulation and that “both industry-specific and cross-sectoral have their
benefits” at 18.18% each. No medium-sized company respondents indicated that they had no preference regarding cross-sectoral regulation. 329 Only one respondent from a small company with 10 to 49 employees responded to this question, and indicated that their
preference is cross-sectoral regulation applying to all companies regardless of size or sector. There were only three
respondents to this question from companies with 250 to 500 employees, and they were evenly split, with one each
respectively preferring cross-sectoral regulation applying to all companies regardless of size or sector, industry-specific
regulation and no preference. 330 This option was selected by 13.73% of business respondents.
123
“There is the need for a basic horizontal law covering all sectors and sizes. In
addition, sector specific measures would be beneficial if paired with a smart mix
of other policy measures, e.g. EU uses its trade and development policies to
actively contribute to systemic issues common to the sector in question.”
“We source cross-sectoral so it would be a benefit if all supply chains are covered.
However, some industry-specific should be considered. For industry-specific, the
requirements could also more specific and would therefore have a better impact.”
“Issues are often linked to small local players, who tend to free-ride on voluntary
standards”
“As many other standards such as financial reporting standards, it doesn't make
sense not to treat different industries equally. It must be obvious which industry
and which size of companies are responsible for violations against responsible
governance.”
“Regulations should take into account the very different structures of companies,
which partly might be captured through industry specific regulations. How
concentrated vs diversified is the supply chain in number, locations and types of
actors. How decentralised, etc.”
General survey respondents expressed a strong preference for cross-sectoral regulation.
The majority of 45.58% preferred “[c]ross-sectoral regulation, applying to all companies
regardless of size or sector”. The second choice of general survey respondents (19.05%)
was “[c]ross-sectoral regulation, applying to companies of a certain size regardless of
their sector.”
Only 13.61% of general survey respondents selected “[i]ndustry-specific regulation,
tailored for a specific sector only and applying only to companies operating within this
sector.” Similarly, only 13.61% indicated that “[b]oth industry-specific and cross-
sectoral options have their benefits.”
For this question, the differences between civil society and industry organisation
respondents are noteworthy. Over two thirds (67.86%) of civil society respondents
selected a preference for “[c]ross-sectoral regulation, applying to all companies
regardless of size or sector”. In contrast, this was the least preferred option by industry
organisation respondents, at only 9.52%. Instead, industry organisations expressed a
preference (38.10%) for “[i]ndustry-specific regulation, tailored for a specific sector only
and applying only to companies operating within this sector”, which was only selected by
7.14% of civil society respondents.
It is also informative to compare the preferences of business survey respondents with
those of industry organisations. Whereas both these groups have a preference for
“[i]ndustry-specific regulation, tailored for a specific sector only and applying only to
companies operating within this sector”, there is a high preference for this option
amongst industry organisations (38.10%). In contrast, only (25.49%) of business
respondents selected this response, and followed it closely (with a margin of less than
1%) by a preference for “[c]ross-sectoral regulation, applying to all companies
regardless of size or sector”, which was the least selected preference of industry
organisations at only 7.14%.
124
Q43 Business Survey; 102 responses - Q36 Stakeholder Survey; 147
responses.
When asked to elaborate on their survey responses in optional text boxes, general
stakeholders provided extensive comments, a selection of which is listed in Annexure A.
Some of these comments to elaborate on their preference include:
“As expressed in the UNGP, the responsibility to respect human rights should
apply fully and equally to all business enterprises, regardless of size, sector,
operational context, ownership and structure. Measures to address violations
should be based on severity of impacts, scale, scope and irremediable character
rather than sector or company size. If the risks outweigh the profit - which they
may - then inappropriate companies will stop operating, which should be a
desirable goal.”
“…A cross-sectoral regulation applying to all companies regardless of size and
sector would be beneficial in a sense that it does not punish big companies over
small companies. As sectors have different impacts according to economic cycles,
think of commodity cycles booms and busts, it would be a way to capture all
economic activity. Additional, accompanying industry specific sub-guidance or
requirements could be beneficial as it can detail what a company must look at
25.49%
38.10%
7.14%
19.61%
14.29%
13.10%
24.51%
9.52%
67.86%
13.73%
14.29%
7.14%
16.67%
23.81%
4.76%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Businesses
Industry organisations
Civil society/NGOs
Industry-specific regulation, tailored for your company's sector only and applying only to companiesoperating within this sector.
Cross-sectoral regulation, applying to companies of a certain size regardless of their sector.
Cross-sectoral regulation, applying to all companies regardless of size or sector.
Both industry-specific and cross-sectoral options have their benefits
No preference
125
and not give too much way of interpretation of broad guidelines.” [Further
elaboration provided in Annexure A]
“If a cross-sectoral regulation is pursued, it is important to provide non-binding
guidelines for specific industries or types of risk, to make clearer to companies
what is expected of them.”
“Whether or not a company should do due diligence, does not depend on the size
of the company nor on the sector it operates in, but on the risks of possible
negative impact of the company in all of its business operations and business
relations.”
“EU needs human rights due diligence regulation that includes all sectors and
companies. Of course regulation needs to take account that higher risks need
stricter regulation and vice versa but this should not be done through artificial
size or sector limits. For example company size limits implemented through
employee number can create perverse incentives for companies. We also know
that some of the mid-size companies operate in high risk sectors.”
“This should become a natural feature of operating a business in the EU. While
industry-specific and size-specific regulation will naturally develop, it is important
to have the same expectation for all.”
“There is a need for a broad and coherent framework - this does not prevent the
development of specific guidelines for some sectors that are particularly at risk.”
"It is necessary to ensure that European companies – regardless of the sector
they are active in – are obliged to introduce effective, comparable and
comprehensive due diligence processes for their supply chains. This is necessary
to ensure that the new legislation establishes a level playing field and ensures
more sustainable companies’ activities. The necessity to ensure that companies
manage their supply chains in a sustainable and responsible way cannot be
limited to a specific sector of the economy. At the same time, the size of a
company is not necessarily a useful indicator to assess the dimension of the risks
of human rights violations or of negative social and environmental impacts in its
supply chain. For these reasons, any limitation to the necessary European
legislative initiative – sectorial or based on companies’ size – would not be
justified and would significantly limit the positive impacts of the initiative."
“I work on all commodities, and beyond agriculture. A relevant directive cannot
be that specific - if we want "responsible coffee", we need to look at the
chemicals used in the coffee plantations, we need to look at the automotive and
shipbuilding industry that allows international trade, we need to look at energy. A
directive can only be overarching, since our economy does not function in
silos.”331
It is noted in the Problem Analysis and Regulatory Options section that the approach
whereby the same standard applies across sectors, but its content is informed with
reference to the specificities of the sector, is consistent with the understanding of “due”
diligence as a standard of care which would, by its nature, take into consideration the
relevant operating context, including sector.332
331 This comment was included in response to the question about the agricultural subsector in which the respondent works. 332 UNGP 14 provides: “The responsibility of business enterprises to respect human rights applies to all enterprises regardless
of their size, sector, operational context, ownership and structure. Nevertheless, the scale and complexity of the means
through which enterprises meet that responsibility may vary according to these factors and with the severity of the enterprise’s
adverse human rights impacts.”
126
One legal expert interviewee explained how this approach would be applied in terms of a
legal test for due diligence as a standard of care. They indicated that if a general cross-
sectoral due diligence requirement is “applied correctly by a judge”, they would expect
sectoral guidance to provide content to the whether the due diligence expectation was
met by the specific business in the circumstances:
In practice there are specificities on the extent of this due diligence [requirement]
for specific business in specific sectors. This is where the guidance should actually
come into practice.
In this way, companies which adhere to industry standards would be more likely to show
that they had undertaken the requisite due diligence even if adverse impacts should take
place. In turn, the expert continued to explain why, in their view, the sectoral approach
is problematic:
“What definitely should not be pushed for is only taking a few sectors as identified
on risks and to say only the business in these sectors have a human rights due
diligence obligation, and not the others. This is what should be excluded...
Applying a sectoral approach to say “This is a [high] risk [sector]” and “This is not
a [high] risk [sector]” will definitely come with discrimination between industries,
between companies. So this is why I would not recommend to go for a sectoral
approach.”
An interviewee from a transnational company indicated:
There is the need for a quite a broad horizontal piece making a requirement for
all businesses, that should just be part of the cost of doing business in the
European Union, and everyone does want to have access to that market. But I do
also see benefits potentially in doing sectoral measures.
An interviewee from civil society indicated:
We are not in favour of a mechanism that is only applicable to certain sectors. We
want a general requirement. Mainly because it is quite challenging to identify
sectors that don’t pose any risks. Clearly there are some sectors that pose lower
risks, but it does not mean that they don’t pose any. And also, the diligence is the
“due” diligence. So you can make an assessment yourself as a company, “well,
actually I think our risks are quite low, therefore, these are the measures that we
have taken”, and that’s kind of the end of the matter, as it were. But given that
the fragmentation is an issue, creating another range of requirements for specific
groups of companies, that’s quite problematic.
The fact that many companies operate across several sectors was also listed as a reason
why it would be problematic to have a sectoral approach by several interviewees. An
interviewee who works with companies on their due diligence indicated:
[I]n terms of legislation, I'm not quite sure why you would pick one sector and
not others. To be honest, [due to] the nature of the global economy, they're too
intimate anyway. If you look at the apparel and textile sector there are lot of
problems further down the supply chain. You go right down to cotton fields and
that’s an agricultural supply chain, that feeds into apparel and textile supply
chain, that feeds in to prep general manufacturing. I think that’s too interlinked.
I’m not quite sure how you [could] have a different set of rules. You could have
of course, guidance for different sectors stemming from legal requirements, but I
don't think it would be valuable to focus on just one sector.
127
Rather, I'd like to demand [the same due diligence from] major companies across
the board, because we know from the UN ILO figures vulnerable work in
international supply chain is on the rise, particularly in emerging market
economy. It's not just one sector, and this is a problem. It is the nature of the
global economy. It's where the way the business model follows the
structures…That is not specific or unique to any one sector or supply chain.
An interviewee working within the government of a large Member state indicated:
When it comes to the idea of human rights protection, it’s weird to say that
human rights count for some sectors and not for others. It would be incoherent
for companies working cross-sectorally.
A number of interviewees suggested that a way to reconcile the need for a cross-sectoral
due diligence, compliant with the UNGPs, and the need to take into consideration the
specificities of the due diligence requirements in different sectors would be to adopt an
overarching approach with general cross-sectoral mandatory due diligence regulation
accompanied by sector-specific guidance specifying what due diligence is in the
particular sectoral context. One interviewee from a civil organisation indicated in this
regard:
You would have a general framework for all sectors but then, within each sector,
specific guidance. It is what the OECD does with sector specific guidance under
the rubric of guidelines or guidance. I think that is something which a judge
would take into consideration in a court case: what is reasonable in the textile
sector as versus what's reasonable in the mining one.
An interviewee from an international network of NGOs which promotes corporate
accountability with a particular focus on the OECD Guidelines indicated:
You would want to have a general requirement because that's where the level
playing field argument is coming from. And it makes normative sense because you're
already expecting all companies to do it. Why single out certain ones? But then you
could focus guidance or additional specifications or requirements on specific high risk
sectors.
It is noted that on the question of cross-sectoral application, there seems to be some
trends based on stakeholder group. There is a suggestion that large companies or
multinationals in particular have a preference for a cross-sectoral standard which would
level the playing field, but which is applied in a way that takes into account the sectoral
particularities. In contrast, industry organisations, which represent a broader range of
business than only multinationals, take the opposite view and have a preference for
regulation which is industry-specific. A few low percentage of industry organisations are
in favour of cross-sectoral regulation which applies to all companies regardless of size,
which was the first choice for civil society stakeholders.
5.5.1 Cross-issue versus issue-specific
Survey respondents were asked about their preferences for regulation which covers all
human rights and environmental impacts or only specific issues, such as modern slavery
or child labour. The majority (47.06%) of business respondents preferred regulation to
apply across all issues. Less than half of this number (23.53%) preferred regulation
which focuses only on one issue such as modern slavery or child labour. Only 4.9% (the
least selected option, below no preference), preferred “[i]ssue-specific regulation
covering another specific human rights or environmental issue”.
128
Overall, the same preferences were expressed by respondents within company size
groups. 45.45% of large companies (1000+ employees)333 and 55.56% of respondents
with 250 to 500 employees preferred regulation which covers all human rights and
environmental impacts. The vast majority (72.73%) of medium-sized had a preference
for regulation which covers “all EU-recognised human rights and environmental
impacts”.334 The main exceptions were micro respondents, of which 75% had no
preference, and respondents with 500 to 1000 employees, who were evenly split
(33.33% each) between cross-issue regulation, issue-specific regulation, and no
preference.
Comments provided by business respondents on this question in optional text boxes
within the survey include:
“I would rather go for a regulation encompassing all EU-recognised human rights
and environmental impacts, so that companies really develop a holistic
framework rather than focusing on an issue and forget everything else.”
“Issue-specific regulations make life complex and costs more to companies to
implement - having to have multiple processes and reporting requirements.
Companies have adverse impacts on virtually all human rights, as per the UNGP
foundational principle. So, from both risk perspective and effectiveness (cost)
perspective, it has to be all human rights expressed at a minimum in the
International Bill of Human Rights.”
“Child labour and modern slavery are two important topics, but other topics such
as discrimination, harassment, working hours, etc are all important to ensure the
workers are working in a good condition. In addition, it is not very practical to
conduct supply chain due diligence on only one or two topics. If we pay a visit to
our suppliers, we might as well cover as much topics as possible, to get the best
value out of the trip.”
“Certain issues may require more in-depth disclosure such as modern slavery or
child labour. However the UNGP suggested that a company should build up a
management system to detect and address a broader set of human rights risks. If
a regulation on mandatory HRDD then it would be beneficial to follow the
guidance of the UNGP to a larger extent. This is in any case the standard that
larger companies are held against. In the UNGP there are also provisions for
smaller company implementation that could be beneficial to look into for the
formulation should it apply to all companies.”
“Not separating out issues but rather focusing on regulating processes are more
relevant.
“It should cover all human rights.”
Similarly, general respondents expressed a very strong preference (74.15%) for
“[r]egulation which covers all EU-recognised human rights and environmental impacts.”
Only 9.52% expressed a preference for issue-specific regulation “for example covering
only issues of child labour or modern slavery”. The least selected option by only 2.04%
of general survey respondents was “[i]ssue-specific regulation covering another specific
human rights or environmental issue”.
333 Followed by 23.38% which prefer issue-specific regulation, such as covering child labour or modern slavery, 18.18% had no
preference, 6.49% preferred issue-specific regulation which cover other issues, and 6.49% indicated that both issue-specific
and broader options have their benefits. 334 This was followed by two medium-sized company respondents having a preference for issue-specific regulation, and one
medium-sized respondent selecting that “Both issue-specific and broader human rights and environmental options have their
benefits”. No medium-sized respondents indicated that they had no preference regarding cross-issue regulation.
129
It is interesting to compare the responses received from civil society, industry
organisation and business respondents. Both business respondents (47.06%) and civil
society respondents (89.29%) had a marked preference for cross-issue regulation which
applies to all EU-recognised human rights and environmental impacts. This was the third
preference of industry organisation respondents (28.81%).
In contrast, industry organisations preferred (38.10%) “[i]ssue-specific regulation, for
example covering only issues of child labour or modern slavery”, which was selected by
only 23.53% of business respondents as their second preference, and by a mere 2.38%
of civil society organisations as their third preference.
One interviewee indicated that issue-specific regulation "risks that it focuses just on
modern slavery, which makes sense on being an easier political entry point ... but we do
see companies saying 'I've done modern slavery so I've done business and human
rights'.”
Similarly, one interviewee representing a trade union association indicated:
Forced labour receives high levels of attention, but we deplore that other
fundamental aspects of human rights receive less attention and tend to be less
often covered in law.
Another interviewee indicated:
"It's one of the unintended consequences [of the UK MSA] that you see: most
companies have some exposure on modern slavery, but for plenty it's not their
most salient issues. But a law that focuses on that is what gets the attention of
their boards, and that's what drives resources and prioritization. And it's not
necessarily what the UNGPs would hope that the companies are prioritizing, and it
can distract from more salient and more significant issues".
The question of cross-issue regulation seems to be one aspects on which the vast
majority stakeholders across the spectrum agree.
5.5.2 All companies regardless of size
As is evidenced in the Regulatory Review, some of the existing due diligence-related
laws apply to certain large companies only, such as the French Duty of Vigilance Law and
the EU Non-Financial Reporting Directive. Nevertheless, the UNGPs indicate that all
companies should exercise due diligence, regardless of size:335
The means through which a business enterprise meets its responsibility to respect
human rights will be proportional to, among other factors, its size. Small and
medium-sized enterprises may have less capacity as well as more informal
processes and management structures than larger companies, so their respective
policies and processes will take on different forms. But some small and medium-
sized enterprises can have severe human rights impacts, which will require
corresponding measures regardless of their size. Severity of impacts will be
judged by their scale, scope and irremediable character…[T]he responsibility to
respect human rights applies fully and equally to all business enterprises.
One interviewee who works with companies on their due diligence practices agreed with
this approach as follows:
335 Commentary to UNGP 14.
130
I'm a proponent of the UN Guiding Principles on Business and Human Rights. The
size of the company dictates what leverage they'll have … and [more is] required
of and demanded of larger companies. I'd encourage you to look at ensuring
consistency with the UNGPs on that level and tailoring the expectations demand,
so the SMEs can comply.
As indicated above, survey respondents were asked about their preferences with respect
to the different sub-options. Amongst both business and general stakeholder
respondents there was a preference for regulation which applies regardless of company
size.
However, varying views were expressed in the optional text boxes for the business
survey about whether regulation should apply to all companies regardless of size. Some
of those business respondents who were in favour of regulation applying to companies of
all sizes indicated:
“Human rights abuse and pollution could happen regardless of the size or sector.
In some cases, the smaller the company, the more informal it is, and the higher
likelihood of abuse.”
“[A]ll companies regardless their size or sector should be concerned by the new
regulation in order to avoid free riders, i.e. small enough B2B companies which
are never looked at because they are unknown to the public/consumers and can
continue to operate as they wish without being under scrutiny.”
“Companies's value chain cut across multiple sectors. For effective
implementation and level-playing field, it has to be cross-sectoral, and also
regardless of size, because vulnerable groups are pushed into smaller and
medium size sub-contractors, and we need to be able to cover them.”
“Regulation would be best if applied to all sectors and not only to big companies.
Even small companies might have severe human rights risks and they often
supply to bigger companies. The focus should be on knowing ones risks and
working towards minimizing them which would be scalable for bigger and smaller
companies.”
“We believe that in order for due diligence through the supply chains to be
effective we need to get as wide participation of companies of different sizes and
different industries as possible in conducting due diligence. Implementation
schedules, incentives and other support measures could be considered to
prioritise action. There could be differences in the level of requirements set for
different sized companies and for mid-sized or smaller companies there needs to
be support mechanisms and tailoring of expectations to their size. Cross sectoral
regulation and other voluntary collaborative measures could be considered in
order to create a smart mix of measures to drive wide-reaching impacts. Also
different business sectors may benefit from each other if/when operating in
similar geographical areas.”
“To reach a level-playing-field it is important, from my point of view, to require
due diligence from all companies. However, at the same time, it is absolutely
necessary to differentiate between companies (potential) impacts. Good
indication for this are laid out in the UNGP. Though the same elements should be
undertaken, the scope and depth of these need to be flexible both to relate to
sector specific elements and company specific characteristics.”
131
Other business survey respondents disagreed, commenting that SMEs should be
excluded from the regulation. For example:
“Adjusted to specific necessities within the sector but also, very important,
applying to companies of a certain size.”
“Only large companies will have enough resources to implement the mandatory
due diligence. If you try to apply it to all companies, it will probably undermine
the effectiveness of the regulation.”
“Only large companies in susceptible industries should be subject to new
requirements. the smaller the company, the the less regulations can be applied
without harm the less international the industries supply chain, the less
regulations are needed No SME should be subject to new regulations.”
“Minimum company size should be the first criterion to be established for new
mandatory regulation, as under a certain size such regulation would represent an
excessive burden for companies to comply…”
Most interviewees were slightly clearer about a preference to include SMEs in the scope
of the regulation. An interviewee with legal expertise relating to the Swiss counter-
proposal explained the approach as follows:
The spirit of UNGPs is based on the risk approach: your due diligence will be
yours. It is higher if you work in risky sector, with a risky product or risky
suppliers. It’s a risk approach. The UNGPs do not exclude SMEs for this exact
reason, in that SMEs can have these risks. This is entirely correct and an
approach that should be followed.
However, the interviewee added that, although the original Swiss initiative included
SMEs within its scope, for “pragmatic” and “political” reasons, politicians do not want to
“impose some bureaucratic burden on small enterprises”:
The proposal which is discussed now, introduces a due diligence obligation only
for big companies, and exclude due diligence obligations for small companies
unless they work in risky sector. Now the problem is (and I don’t really have a
solution, as this is more a political problem than a legal one), is how to find a
solution in accordance with the UNGPs, which would not exclude any kind of small
enterprises. The problem is that now it is for the government to decide which are
the risky sectors. This is where we would come with the problems of a sectoral
approach to business and human rights.
An interviewee from an international network of NGOs which promotes corporate
accountability with a particular focus on the OECD Guidelines explained that the OECD
Guidelines apply to all companies and "explicitly say that they represent good practices
for all businesses". The interviewee suggested that an EU-level regulation on mandatory
due diligence would ideally have "a broad application" and apply to all companies,
including SMEs, but would "focus implementation or enforcement efforts on a risk
analysis based on severity of risks".
Alternatively, an interviewee from Ecoda, the European Confederation of Directors
Institutes, had a preference for any mandatory regulation to “start with” large listed
companies:
Start with the large listed companies because they have a much bigger impact in
every sense: usually labour force, activity, turnover, suppliers, customers,
number of sites, number of activities, pollution impact, corruption impact. They
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have a huge impact so they should be targeted first, because then they show the
way to their suppliers, to their consumers, and to their competitors. SMEs have
limited resources and specifically when it comes to their boards.
One interviewee working for a civil society organisation suggested that SMEs may be
gradually included through transitional period:
Things can go wrong at the small and medium company level … I would be
reluctant to remove this group, but maybe a transitory period could be an idea to
think about.
One interviewee indicated:
As somebody who works in a [small] company … I can see how that is potentially
problematic, at least at first look. When you think that I now have to do due
diligence on everything that I am buying, well how on earth am I supposed to do
that? I think for the majority of SMEs, I am not saying that they should not be
required to do it, but careful thought would be needed about what it is they are
then required to do. But I would not blanket rule small companies, because there
are obviously some SMEs are that operating in what would typically be classified
as high risks sectors. It falls back to that first question: therefore do you try and
identify which sectors are high risk? Well, we know that’s really difficult.
Ultimately the only answer is that it should apply to everybody, with an emphasis
on you do the due diligence that is appropriate to your size and your risk, and
also obviously your leverage. Do I as a tiny company have really any leverage?
Well, frankly, no. If I am a tiny company, and I am running a mine and I’ve
decided to buy up a load of land and open up a mine there, then yeah absolutely,
I do have leverage. Do I have leverage over Microsoft that I buy IT services
from? No.
One interviewee working for a commerce association in a Member State where
mandatory due diligence is currently being considered indicated:
The biggest companies are on the radar of the media regarding human rights,
they obviously do it for their image. But there are companies that do not have
the resource or knowledge to do it, or do not find it equally important. There is a
need to require it from all.
Some companies have argued that their due diligence costs would be reduced if the
regulation applied to all companies, regardless of size, including SMEs. This argument
was summarized as follows by one company interviewee:
The best that can happen is that there is a law that applies not only to big
companies. I mean I can understand why, I can understand the scope of
legislations. But if you have SMEs understanding the Guiding Principles … Because
SMEs are my suppliers. So instead of having to go to my SME supplier, and doing
the due diligence in his house, if he were also obliged to apply the law or
understood that it was his responsibility, then we could work together. And we’ll
always have my resources, I can always help you. I do always have to hold up to
my standards, because I am the one with more public scrutiny that you, because
you are an SMEs. But the problem with the Guiding Principles and the due
diligence is that because the focus has been put only on multinational companies
we have had no other way of approaching this than with a very patronising
manner. So I go to an SME, which he is also a business person, he also has
workers, he also has impacts, and the only thing that he does is he sits back in
his chair, and he allows me to do a due diligence in his place. To understand if he
has got everything okay, the contracts are okay, the workers are happy, the
133
community is happy, if environmentally he is not damaging the community. So
let’s get these SMEs involved, this will help everyone.
However, an interviewee from civil society expressed concern about this kind of
approach:
This strikes me as somewhat problematic. That kind of statement would be
concerning to people who do a lot of work on supply chain issues, because one of
the worries is that the powerful and wealthier actors, the better resourced actors,
just shove the responsibility down the supply chain. So we have heard again of
small companies being told you have to sign a declaration that says I guarantee
there is no modern slavery in my own supply chain. And these small companies
are saying I can’t guarantee that, but I need the business, so what am I
supposed to do? Now I do not think anyone has really resolved how you deal with
that, it’s complex and there are things that need to be consider in contract law
and we have not thought that through yet. But that statement worries me that,
because that does then imply that you just hold up your hands and say that we
have done all that we could and it was this little guy. Now maybe in some cases
that will be the situations – not everyone in the supply chains has a halo, and we
all know that, but equally that would not be an effect that we would want to see.
One interviewee working within the government of a large Member State suggested a
gradual approach, whereby an EU-level regulation would initially apply only to large
companies, after which its scope could be broadened to the remaining companies.
An interviewee who works with businesses in the implementation of the UNGPs stated
that:
On SMEs, we've always been very skeptical of the argument that this is somehow
not possible, or unreasonable to ask of SMEs. And in some ways it can be easier
for SMEs to address human rights responsibilities. This is often an issue that goes
to values. If you're also the owner of the business, you get to say what happens.
And most owners of businesses that I know do want to be responsible employers
and responsible business partners, so there's a values angle there. And there's
maybe more clarity around: ‘What is it that we're doing? We don't have huge
numbers of diverse products or supplier lines, and we can get a handle on this’.
In a recent project working with leading SMEs, the business and human rights expert
organisation Shift found that the view that SMEs lacked resources and expertise to
manage human rights issues did not actually hold truth in practice.336 In fact, they found
that "small and medium sized businesses can boast significant advantages over their
larger counterparts when it comes to realizing their responsibility to protect human
rights".337 In particular, they highlighted that SMEs tend to have fewer suppliers and
customers, enabling deeper and better-quality relationships. Their smaller scale and
inclination towards longer-term bespoke relationships can lead SMEs to engage with
suppliers and their workers.338 In addition, when top leadership of the SME is committed
to respecting human rights, there are fewer obstacles to navigate than in large
companies. However, Shift explained that prioritizing which issues to address is crucial
for SMEs.339
336 Francis West, “SMES and the Corporate Responsibility to Respect Human Rights: Busting the Myth that Bigger is Always
Better”, Shift (May 2019), available at: https://www.shiftproject.org/resources/viewpoints/busting-myth-smes-corporate-
responsibility-respect-human-rights/. 337 Ibid. 338 Ibid. 339 Ibid.
134
This understanding of SMEs potentially having smaller footprints and accordingly less
need for resource-intensive or formal processes was confirmed by an interviewee from a
business membership organisation as follows:
The difference is that in a very small company the executives and the Board,
which is usually smaller and very linked to the company, are part of the game. In
a big company the executives are part of the game, but at such a high level that
they are far from the operations in reality. And the Board also.
So I think it is right to ask those who are far from the operations to take account
of all these risks and to ensure that these risks have been studied, have been
looked at and documented in policies etcetera.
In a small company, you could say that just need to ensure that this is looked at,
full stop. Because if it is not looked at the company will die anyway, the risk is
simply that high. If I am a one-man company, I look at it myself. I do it. I am the
owner, the CEO and the operator.
The interviewee argued that, for this reason, the mandatory standard should first apply
to large listed companies, and that more formal processes should be expected for large
companies:
As we do for financial matters. A small company can be bankrupt, and it can
create many problems for its customers or its labour force at a very local level,
but financially we just produce two or three documents and that’s it. And you
should have a similar sort of proportionality.
5.5.3 Enforcement, liability, and remedy
In order to be “mandatory”, a regulatory intervention would need to establish legal
liability for a failure to meet the due diligence standard. This could stake place through a
state-based oversight mechanism, judicial or non-judicial remedies, or both. These sub-
options for enforcement are discussed further in the Problem Analysis and Regulatory
Options section.
General survey respondents were asked which type of current regulation is the most
effective.340
The rankings and their weighted averages were as follows, from most effective to least
effective, and by stakeholder group of general stakeholders, civil society respondents,
and industry association respondents.
It is notable that the industry organisation responses are in almost the exact inverse of
those of civil society (and general stakeholder) respondents. In particular, civil society
and general stakeholders view current mandatory due diligence coupled with criminal
liability or fine as the most effective, whereas industry associations view these as the
least effective. Civil society and general stakeholders’ second choice is mandatory due
diligence coupled with civil remedy, and this is the second from the bottom for industry
respondents. Due diligence requirements linked to public procurement and / or export
credit are rated as the third most effective by civil society and general stakeholders, and
the third least effective currently the least effective by industry associations.
340 This question was not asked in the business survey, which was significantly longer than the general survey, and contained
more detailed questions around costs and benefits of implementation under each regulatory option.
135
In contrast, the type of current regulation which industry organisations view as the most
effective, voluntary guidelines, is indicated as the least effective by civil society and
general stakeholders. Industry associations’ second choice, reporting requirements with
no liability for compliance, as rated by civil society and general stakeholders as the
second least effective type of current regulation.
Q14 Stakeholder Survey; 159 general responses.
The findings are interesting in that they demonstrate the directly opposing views of civil
society and industry organisations regarding the effectiveness of different types of
regulation.
They also reveal a bias by stakeholder group, insofar as it seems that certain
stakeholders have certain preferences based on how onerous for business the
requirements are, or how robust the enforcement.
For example, not only do civil society organisations rate mandatory due diligence
regulation as the most effective, but those mandatory due diligence requirements with
the most robust enforcement, namely criminal liability or fine, are rated above those
coupled with less severe liability in the form of civil remedies.
It is also important to note that this question related to the effectiveness of current
types of regulation, of which there are very few existing examples of mandatory due
diligence requirements which are coupled with either criminal or civil liability (as set out
in the Regulatory Review section). As such, the experiences of civil society respondents
with the effectiveness of current examples of these laws would be limited, and ratings
relating to effectiveness are likely to be based on preferences for future regulation (see
question below). These preferences may be explained by the fact that many of the civil
4.52
4.45
3.6
3.43
2.84
2.16
5.21
4.92
3.52
3.38
2.48
1.48
1.88
3
3.71
3.63
4.33
4.46
0 1 2 3 4 5 6
Mandatory due diligence requirement coupled withcriminal liability and/or fine
Mandatory due diligence requirements coupled withcivil remedy
Due diligence requirements linked to publicprocurement and/or export credit
Reporting requirements: liability through directors'duties or consumer rights
Reporting requirements: no liability for non-compliance
Voluntary guidelines
AVERAGE SCORE
TYP
E O
F R
EGU
LATI
ON
General stakeholders Civil society respondents Industry association respondents
136
society organisations that participated in the survey are currently involved in campaign
for mandatory due diligence developments.
On the other hand, industry organisations seem to have chosen the types of regulation
which are the least intrusive, i.e. with the least requirements for business. Voluntary
guidelines, which by their nature are not binding, were selected by industry
organisations as the most effective form of current type of regulation. Although this may
be a reference to the UNGPs, which is seen across the spectrum of stakeholders as the
most influential standards in this area, the limitations of voluntary measures have been
well-documented in the literature, as well as the interviews conducted for this study.
This preference for voluntary guidelines may be explained by the following statement by
an industry organisation in an optional text box:
The risk of reputation and sanctions by the market attached to soft law is more
effective than hard law and lengthy procedures. They have proven a real
incentive for progress and changes.
Another interviewee from a business membership organisation explained:
We are of the opinion that any EU-level regulation of this matter should be
confined to voluntary guidelines which should be developed in close cooperation
with the companies concerned and be fully in line with already existing
frameworks. The key aim of [Corporate Governance] Codes is to raise the
[corporate governance] level above that required by law.
This stakeholder indicated that “mandatory regulation means this is the minimum which
everybody must do” and that “you have leaders who do much better or much more than
the regulation asks for and who set the trend”.
However, regardless of the validity of the choice of voluntary guidelines as the most
effective means of driving corporate behavior, this preference is followed by reporting
requirements with no liability for non-compliance. Insofar as there were other reporting
requirements listed which do have legal consequences or other incentives attached
(through directors’ duties or consumer rights), it is not clear why those currently
reporting requirements with no liability attached would be more effective than reporting
requirements which do lead to liability.
In all, the order in which the types of regulation were selected by both groups suggest
that, rather than effectiveness, industry respondents may have selected types of
regulation in order of the least to most strict or intrusive, and civil society organisations
have selected types of regulation in order of most to least strict or intrusive.
In contrast to the above question, which was about current regulatory types, general
survey respondents were also asked which type of regulation they think should be
introduced for the most effective due diligence through the supply chain. The rankings
and their weighted averages were as follows, from most effective to least effective:
137
Q15 Stakeholder Survey; 155 general responses.
Here the same observation can be made as above regarding the apparent bias according
to stakeholder group for types of regulation. Again, civil society stakeholders prefer
regulation from the most strict (mandatory due diligence requirements coupled with civil
liability or fines) to the least strict (voluntary guidelines).
The preferences of industry organisations are in the exact reverse order. There is a
preference for voluntary guidelines to be introduced, which is revealing, given the
influence of the existing voluntary measures indicated by the same industry organisation
stakeholders in the preceding question.
The fact that civil society and industry organisations have directly opposing preferences,
and their selections follow the same order relating to both current types of regulation
and regulation that should be introduced, again reinforces the impression that these
selections were made not based on effectiveness but on level of interference or
strictness of the regulation.
In contrast to the views of industry organisation survey respondents, which unlike other
stakeholder groups seem to have a preference for regulation with no or the least amount
of enforcement, interviewees from across the spectrum of stakeholders, including
multinational companies, confirmed the importance of enforcement.
An interviewee from a multinational company which publicly supports mandatory due
diligence regulation at EY level indicated that the mandatory character and
accompanying enforcement is essential for creating a level playing field:
4.56
4.54
3.6
3.44
2.74
2.12
5.03
5.19
3.51
3.33
2.44
1.51
3
1.92
3.46
3.79
4.33
4.5
0 1 2 3 4 5 6
Mandatory due diligence requirements coupled withcivil remedy
Mandatory due diligence requirement coupled withcriminal liability and/or fine
Due diligence requirements linked to publicprocurement and/or export credit
Reporting requirements: liability through directors'duties or consumer rights
Reporting requirements: no liability for non-compliance
Voluntary guidelines
AVERAGE SCORE TY
PE
OF
REG
ULA
TIO
N
General stakeholders Civil society respondents Industry organisation respondents
138
It's important that it is mandatory to create a level-playing field where all the
companies play by the same rules and have to incur the same costs that are
associated with doing due diligence and remediation once you find the issues. So
for us it is very important that it is mandatory and enforced.
A survey respondent from a trade association stated:
Only a European legally binding directive would provide for the upwards
convergence of human rights and social standards as well as environmental
standards, leading to sustainable business conduct… the European legal
framework should establish effective and dissuasive sanctions for any violations
to companies’ obligations, as well as precise liability for damages in companies’
(and their subsidiaries’) supply chains.
One interviewee from a multinational company indicated, regarding reporting
requirements which lack enforcement:
If there was to be a well-crafted solution at the European level, it would need
more enforcement than, for example the UK Modern Slavery Act has. We're
asking for a level-playing field but we also recognise that something of the nature
of the UK law probably wouldn't create a level-playing field because basically it
lacks enforcement.
This was confirmed by an interviewee from civil society:
Levelling the playing field: We say that that is one of the reasons that this would
be good for companies. We have heard companies, and seen it in writing, that
the [UK] Modern Slavery Act, the absence of enforcement – and that is a really
important point when it comes to levelling the playing field, is the need for
adequate implementation and enforcement – we’ve seen companies saying: ‘We
have implemented measures in our supply chains to try to deal with issues
around forced labour, and that means there is a price implication for us, and we
have lost out on public contracting because our price is higher.’ And they are
saying that we need this to be enforced, because that’s wrong.
Regarding the enforcement, the interviewee added:
What is it that you are enforcing? Are you enforcing failure to do the due
diligence? Is the enforcement around failure to do adequate due diligence, or is
enforcement around the harm? And if so what does that enforcement look like?
One interviewee within the government of a large Member State indicated:
Having a regulatory framework in place [without enforcement] does not [ensure]
better protection or improvement of human rights or environment.
One interviewee from a civil society organisation indicated that:
There is an overall duty of care demanded of international brands in terms of
what they are able to do and where they are able to source it. The bar is set so
low that they can knowingly source from factories that engage in exploitation.
There's very little consequence in terms of legal liability. Now, their biggest
problem is brand reputation - still - and media, trade union or civil society
reporting on exploitative conditions. In terms of the legal framework governing
international supply chain, there is very little really for them to comply with.
An interviewee from an environmental NGO stated that:
139
In terms of what could be done to address the situation, I really think that ...
having due diligence [should] be mandatory so that everybody has to do it, but
also there being some possibility of liability is key ... The whole point is that
people aren't fixing these problems, because they don't have to, basically. And if
they had to, i.e. if there were consequences for not doing it, all these things that
just seemed too complicated to fix, I wouldn't be surprised if suddenly some of
them, not all of them, became a lot easier to fix. Because companies would
actually invest significant resources and see it as a priority relating to their core
business, rather than the isolated activities of a CSR or public relations
department. And if they thought that they could face significant legal or financial
consequences for not carrying out due diligence, including remedying or taking
reasonable efforts to remedy the harms, then I think that would be a big step
forward from the current situation.
The interviewee added:
Being required to do due diligence and facing the threat of liability would make
companies do much more extensive due diligence.
Enforcement through state-based oversight mechanisms
Interviewees generally indicated that a state-based oversight mechanism could be
helpful in enforcing any potential regulation. One interviewee from a multinational food
and drinks company indicated:
It might also be that such a specific authority might have a better knowledge
than any civil judge. And might be more understanding [of] what could be the
right solution when it comes to enforcing the law. Also maybe bringing everyone
around the table and look at what can be done, on top of sanctions, or in
replacement of sanctions.
However, some interviewee highlighted the potential limitations or resource prohibitions
of such a body.
Interviewees indicated that enforcement through state-based oversight mechanism such
as administrative bodies, regulators or other government bodies would potentially be
prohibitively costly.
One interviewee indicated:
I cannot imagine that the state has the financial means to have a body that will
supervise any issue about human rights or environmental impact on any company
in [the country] or working from [the country]. I cannot imagine having such a
big administrative authority that will be able to look at all human rights impacts
in all sectors in one country. This is why I think this is a better approach to go for
a civil liability, as discussed in France, in Switzerland and in other countries, also
existing in the UK, to help those who were directly damaged to take their own
steps before the courts.
Another interviewee from civil society indicated:
I think there is a case to be made for criminal-level responsibility for very serious
abuses. Not to diminish the seriousness of other abuses, but the political reality is
the resources required. Again, we talked about this with the person working on
the timber regulations. They were saying you are talking to someone who has cut
a log way down the supply chain in rural Brazil. I have to get together police
140
resources. They have to cooperate with the local police force, whose resources
are already stretched. My resources are already stretched. Ultimately, the fine is
not going to be that big. Well, really, is that going to be prioritized? And I think,
frankly, in most places it isn’t, and that has been the issue with the criminal
approach.
One interviewee from an environmental NGO stated that:
There needs to be actually a proper framework around the control of due
diligence. I think that's something we learnt with the EU Timber Regulation: if
you have no proper controls which are at least partly aligned, then you have
challenges. We need to be clear in the EU: the right of implementing legislation,
so checks and these things, is up to the Member States. It's their responsibility.
But we do also think that there needs to be a bit more of a level-playing field
amongst the different Member States and corporations. So when we talk about
EU legislation on due diligence, we need to look at it from both sides: what does
it mean for companies, but also what does it mean for the enforcement of
legislation.
Enforcement through civil remedy
State-based oversight and enforcement mechanisms such as fines do not ordinarily
provide for access to remedies for those affected by the harms. As discussed in the
Problem Analysis and Regulatory Options section, victims of corporate human rights and
environmental harms currently face well-documented barriers to access remedies
against companies. Access to remedy is set out in Pillar III of the UNGPs and were stated
by many stakeholders, especially those from civil society and trade unions, to be an
essential part of a regulatory option which introduces liability. Some of these quotes are
included elsewhere in this section.
One interviewee from a civil society organisation which specializes in bringing legal
actions for corporate human rights abuses explained that, currently, civil liability is
restricted to the existing variety of tort under civil law. Tort law causes of action are
usually based on harms caused to health, life, and property interests. The interviewee
indicated that this is problematic because it excludes a number of human rights that are
very important.
A survey respondent from a trade union indicated that an EU-level initiative should:
[D]efine an effective framework establishing main companies’ and subsidiaries’
(as well as their directors’) civil and criminal liability for activities in their supply
chains…
[I]ntroduce effective and accessible remedies for victims, trade unions and other
interested parties (including alert mechanisms and access to justice in the
country where the main company is established), and
[A]dequate, proportionate and dissuasive sanctions for any violation of the due
diligence obligations, as well as effective monitoring and enforcement of the
obligations by an independent authority – which shall be separated from the
financial market authorities.
The respondent added that:
The legislative initiative should include the possibility for trade unions to have access
to effective instruments for legal recourse: trade unions’ rights – such as the right to
organize – are often violated and this leads to the fact that trade unions are
weakened and therefore have difficulties to represent and protect workers in
companies’ supply chains.
141
Overall stakeholder views 5.6
Survey respondents were asked for their final overall views of the different regulatory
options.
Although this text box was optional, it was answered by 31 business respondents.
Business survey responses included the following selected comments:
“We don't feel that further voluntary guidance or new reporting would result in
desired impacts. Leading companies are applying the voluntary guidance already
in existence and new reporting requirements would most likely only result in
extra burden of paperwork. If the whole business sector would be active on
different levels of supply networks in conducting due diligence and taking action
addressing the risks identified, we believe that is where the potential for impacts
lies. We also think that a support elements are necessary for smaller companies
and that good due diligence should be somehow incentivised and supported.
What is also important is clarity on interpretation of the meaning of the potential
new requirements and quality of their implementation so that the level playing
field would be created. Also the aim should be a smart mix of measures, both
voluntary and regulatory with the view of creating the optimum end result.”
“We already have [Option] 2 (UNGP, OECD) and [Option] 3 (EU Directive on Non-
financial reporting). These have not effected broad change. The only effective
option will be [Option] 4 to create [a] level playing field. The regulation should
explicitly reflect and align with UNGPs. The scope should therefore be the value
chain, not limited to supply chain, and for all human rights included in the
International Bill of Human Rights per UNGPs, and environmental impacts
(reflecting relevant UN instruments and agreements).”
“I would prefer mandatory due diligence, otherwise companies would find ways to
report without real compliance. That is what I experience since years on the issue
of sustainability and human rights.”
“To create a level playing field and mainstream the adoption of sustainable
practices, mandatory due diligence is necessary.”
“We need regulations, not voluntary guidelines, to work under the same
conditions and to guarantee [the] same conditions all over the world/in Europe.”
“My favourite would be mandatory due diligence in combination with mandatory
reporting requirements.”
“It is recommended that human rights standards are promoted through effective
trade and development agreements rather than imposing more legal
requirements on business.”
“Start with step 2, guidelines. Most companies in EU are still struggling with how
to do due diligence in their supply chain. Guidelines will help. Regulation should
give flexibility as issues are different for different industries. Too prescriptive may
focus attention away from the real issues and, in fact, not produce the required
results”
“If a mandatory due Diligence is considered: It should ONLY be considered for
Human Rights and NOT for environmental aspects as they are regulated enough
already.”
142
The same question with an optional text box was completed by 90 general survey
respondents, many of which were lengthy, even comprising several pages of text each.
In large part, these comments are repetitive of respondent’s earlier answers, already
discussed above. The text box was also used to expand on questions that go beyond the
selection from the four listed options.
As such, these comments are too lengthy to include here, but a selection are included in
the Part IV Annexure A: Survey Responses in Optional Text Boxes. In keeping with the
overall trends set out above, there is a preference amongst general stakeholders as a
whole for mandatory due diligence which is a general cross-sectoral obligations, but
which takes into account the specificities of the sector and other circumstances.
However, a number of stakeholders, including from industry organisations, expressed a
strong resistance against this option.
6. Stakeholder views on effects of EU-level regulation
Survey respondents were asked about the possible benefits of a general due diligence
requirement at EU level.
Harmonisation 6.1
Survey respondents were asked whether they agreed with the statement that EU-level
regulation on a general due diligence requirement for human rights and environmental
impacts may provide benefits for business through “[p]roviding a single, harmonised EU-
level standard (as opposed to a mosaic of different measures at domestic and industry
level).”
The large majority of business survey respondents (75.37%) agreed that this kind of
regulation would provide benefits to business through creating a single harmonized
standard. Only 9.7% of business respondents disagreed with this statement about the
benefits of harmonisation.
These results were slightly more pronounced among large business stakeholders with
over 1000 employees: 81.25% agreed that this would provide benefits single
harmonized standard, with only 6.25% disagreeing, and 12.50% expressing no opinion.
It is also revealing to contrast the responses received from civil society and industry
organisations respectively to this question. Almost all (96.51%) of civil society
organisations agreed that an EU regulation on a general due diligence requirement for
business would benefit business by providing a single harmonized standard. Only 2.33%
disagreed and 1.16% did not know. These numbers indicate that civil society
respondents seem strongly convinced about the benefits which such a regulation holds
for business.
In contrast, the majority of industry organisations also agreed about that such regulation
would benefit business through harmonization, but in significantly lower numbers:
62.5% of industry organisations agreed about such harmonization benefits, whereas a
third (33.33%) disagreed about such benefits. The remaining 4.17% of industry
organisations did not know.
143
Q18 Business Survey; 134 general responses - Q18 Stakeholder Survey; 152
general responses.
One interviewee from a multinational company indicated:
We find quite unhelpful that there are already quite a number of [laws or
standards] and it seems many others coming at national level, which is confusing,
difficult, creates complexity, uncertainty, and that is one of the reasons why we
have been so outspoken about wanting a European harmonized solution.
An interviewee from a financial institution indicated:
In general, I applaud all ideas that create an EU-wide level playing field. I do
think that there is a risk now towards more fragmentation. Everybody applauds
efforts in Australia to come to a Modern Slavery Act, and in the Netherlands
there's been an initiative for a child labour due diligence act. But it all adds to
country or sector-specific legislative requirements. So in general taking this up at
the EU level also has some benefits in that sense. I would strongly oppose us
having to write 5 modern slavery statements in the future just because France,
Germany, Denmark, etcetera also introduced legislations.
An interviewee from an international trade association which works with companies on
their due diligence indicated:
Providing a single harmonized, legal standard at the EU level would be valuable,
and from my point of view, very much desirable. It does help provide more of a
level playing field in terms of what's expected at the advantage of companies
within the EU. I think it also, because of the perceived…legitimacy and authority
of [the] European commission and the EU institutions, I think it's more likely to
be implemented and adhered to the patchwork of national legislation and
different structures.
An interviewee who has been involved with the legal proposal at a national level
indicated:
What is definitely necessary is having something at the EU level to avoid that
states will always have to look at what other states are doing before they start
adopting their own legislation.
75.37%
62.50%
96.51%
9.70%
33.33%
2.33%
14.93%
4.17% 1.16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Businesses Industry organisations Civil society/NGOs
Agree Disagree Do not know
144
An interviewee from a commerce association in Finland indicated:
It’s a global issue so we do not think that it should be legislated by individual
countries. The discussion should be continued at global level: UN, OECD and EU
level. It is a competitive advantage to those countries and companies that do not
want to comply with the rules on due diligence. So it should include as many
countries as possible.
One interviewee from a multinational company indicated that the harmonization of
standards will also create positive opportunities for companies:
Most of our brand’s peers and competitors are European but in different
countries. It is good that we all have the same measures in this case…that we do
get to speak the same language. It is also helpful because we do work a lot
together, so if we get asked the same questions, it will help us standardise the
way we approach things. So it will create more cohesion among brands, and that
has to be dealt with at EU level. For us it definitely made a lot of sense.
Legal certainty 6.2
As set out in the Regulatory Review, companies increasingly face various legal risks,
despite the lack of general legal requirement on due diligence. There are currently a
number of civil and criminal proceedings in different jurisdictions against EU based
companies for alleged human rights abuses in their activities or in their supply chains.341
Companies also face risks of legal claims under the current EU Unfair Commercial
Practices Directive,342 which may be invoked by any consumer misled.
Survey respondents were asked whether they agreed with the statement that EU-level
regulation on a general due diligence requirement for human rights and environmental
impacts may provide benefits for business through “[p]roviding legal certainty”.
The majority (66.42%) of business survey respondents agreed that this regulation could
benefit business by creating legal certainty. Only 11.94% of business respondents
disagreed. Similarly, amongst large companies with over 1000 employees, 72.92%
indicated that this would provide legal certainty, with only 7.29% disagreeing, and
19.79% expressing no opinion.
A contrast between the responses of civil society and industry organisations is again
revealing. Whereas both groups agreed that such regulation would benefit business
through providing legal certainty, 91.86% of civil society respondents expressed this
view, in contrast to only half (50%) of industry organisations. Only slightly less
(45.83%) of industry organisations disagreed that such regulation may provide benefits
through legal certainty, contrasted to a mere 1.16% of civil society respondents. The
remaining 6.98% of civil society and 4.17% of industry organisation respondents did not
know.
341 Axel Marx, Claire Bright and Jan Wouters, “Access to Legal Remedies for Victims of Coporate Human Rights Abuses in Third
Countries“, 2019, available at:
http://www.europarl.europa.eu/RegData/etudes/STUD/2019/603475/EXPO_STU(2019)603475_EN.pdf. 342 EU Directive (2005/29/EC). This requires the company to explain how the products on the markets have been produced,
not only in terms of truthful advertising but also with respect to the codes of conduct which they adopt.
145
Q18 Business Survey; 134 general responses - Q18 Stakeholder Survey; 152
general responses.
An interviewee from a multinational food and drinks company indicated:
It is a problem that we have [such] different legislative frameworks, be they at
early stage or already in force, because for a global company it makes it difficult
to harmonise the way we establish our reporting, for example. And so far it works
because we decided to have a sustainability reporting…which is quite
comprehensive so that it can also be a source of inspiration for the jurisdiction
where we need to make a specific report, like in the UK. But of course, having all
these different approaches make it difficult to navigate because it lacks clarity
[about] what is in the end expected from companies. And when companies do not
know what is expected, from them by the laws, it created uncertainty, and it is
not good for operating a business properly. So having a framework that would
have the same criteria or the most similar criteria possible so that companies
know what is expected from them would certainly be helpful.
One legal expert interviewee indicated:
Why is it necessary to have a specific due diligence obligation in the law? Because
there has been no other option in ten or fifteen years.
The notion of due diligence is really being defined and redefined. It is becoming
clear. It is becoming a clear notion that judges will not be able to just ignore in
the future, even if it is on the level of voluntary standards.
And the situation will be, we can have a common law approach, as in the UK, or
in the US or in Canada, where we will have many cases coming and testing the
notion of due diligence, which is not specified in the law. And this is the biggest
argument, why it is desirable to have it, for legal certainty, to have this due
diligence in the law.
This is exactly what the European Union should do to harmonise this and increase
legal certainty by introducing a clear legal definition of due diligence at the EU
level.
66.42%
50.00%
91.86%
11.94%
45.83%
1.16%
21.64%
4.17% 6.98%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Businesses Industry organisations Civil society/NGOs
Agree Disagree Do not know
146
Competitiveness and “levelling the playing field” 6.3
Survey respondents were asked whether they agreed with the statement that EU-level
regulation on a general due diligence requirement for human rights and environmental
impacts may provide benefits for business through “[l]evelling the playing field by
holding EU competitors to the same standard.”
The majority of business survey respondents (71.64%) agreed with that EU regulation
on mandatory due diligence may benefit to business by creating a level playing field.
Only 10.45% disagreed with the statement.
Amongst large business respondents with 1000 or more employees, 73.96% agreed that
this standard would level the playing field, with only 8.33% disagreeing, and 17.71%
expressing no opinion.
Both civil society and industry association respondents agreed that such a regulation
may provide benefits through levelling the playing field. However, civil society
respondents were convinced in larger numbers (94.19%) of such benefits than industry
organisations (54.17%). In contrast, only 3.49% of civil society respondents disagreed
that such regulation may provide benefits through levelling the playing field, as opposed
to 41.67% of industry organisations. The remaining 2.33% of civil society and 4.17% of
industry association respondents did not know.
Q18 Business Survey; 134 general responses - Q18 Stakeholder Survey; 152
general responses.
Similarly, interviewees agreed that it was important to “level the playing field” by
holding competitors and businesses within the value chain to the same standard. One
interviewee which advises companies on their due diligence indicated that companies
should “not be at a competitive disadvantage for being responsible”.
One interviewee from an international trade association which works with companies on
their due diligence indicated:
I think it's a myth to say companies don't like legislation. [They] [s]ee there's red
tape, [but] when it does level the playing field. Again, if they're already involved
in these practices, it's all direct benefits to them. They love the companies that
have the same standard and they're required to invest.
71.64%
54.17%
94.19%
10.45%
47.67%
3.49%
17.91%
4.17% 2.33%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Businesses Industry organisations Civil society/NGOs
Agree Disagree Do not know
147
An interviewee from a multinational food and drinks company stated:
We would be interested in a legislation that is really levelling the playing field.
Because so far, you have few … companies that have already taken the journey
to conduct human rights due diligence. And on the basis of that you have some
free-riders that benefit from it, and in the end it might not be completely fair to
put all the pressure or the weight on the biggest, because most of the time a lot
of these issues happen at another level.
On 27 March 2019, Barry Callebaut, one of the “big three” companies that together
process around 60% of the world’s cocoa, tweeted: 343
An EU due diligence policy adds value by creating a level playing field among
companies in driving the demand for sustainably sourced raw materials. For it
to be meaningful, it has to be embedded in a strategy led by the EU agreeing
action plans with origin governments.
It has been argued that considerations of creating a level playing also applies to Member
States in adopting laws which require their own companies to undertake due diligence.
One interviewee indicated:
The biggest reason why countries are not adopting a law, is that they fear that
they would have an economic disadvantage in comparison to others who are not
taking these steps.
However, a large industry organisation survey respondent indicated in an optional text
box that they are less confident about the ability of European regulation to level the
playing field in the global market:
There is still no level-playing field with many non-European companies. The gap
is huge with companies from certain non-European jurisdictions, especially China
and the US. Global supply chains will not improve if only European companies –
already advanced with regard to CSR policies – take action.
Non-negotiable standard to facilitate leverage 6.4
Survey respondents were asked whether they agreed with the statement that EU-level
regulation on a general due diligence requirement for human rights and environmental
impacts may provide benefits for business through “[f]acilitating leverage with third
parties by setting a non-negotiable standard”.
The majority (61.19%) of business survey respondents agreed that it would be beneficial
to business if a non-negotiable standard were to be created through regulation. Only
14.93% of business respondents disagreed.
Of large business respondents with 1000 or more employees, 61.46% agreed that this
could facilitate leverage with third parties through a non-negotiable standard. Only
11.46% disagreed, and 27.08% expressed no opinion.
The views of civil society respondents and industry associations were different in this
respect. The vast majority of civil society respondents (90.70%) agreed that such
343 Barry Callebaut Group: ”An EU due diligence policy adds value by creating a level playing field among companies in driving
the demand for sustainably sourced raw materials. For it to be meaningful, it has to be embedded in a strategy led by the EU
agreeing action plans with origin governments. #MEPs4RBC”, Twitter, 28 March 2019, available at:
https://twitter.com/BCgroupnews/status/1111153494537445377.
148
regulation would benefit business through creating a non-negotiable standard for
leverage, compared to 41.67% of industry organisation respondents. In contrast,
industry organisation respondents disagreed (45.83%) that regulation would benefit
business through a non-negotiable standard, a view which was shared by only 3.49% of
civil society respondents. The remaining 12.5% of industry organisation and 5.81% of
civil society respondents did not know.
It is notable that this is an example where the views of industry organisations are
distinctly different from the views of business respondents. The majority of business
respondents (61.19%) agreed about the benefits of such regulation for creating a non-
negotiable standard, whereas industry associations did not agree about these benefits
(45.83%).
Q18 Business Survey; 134 general responses - Q18 Stakeholder Survey; 152
general responses.
One interviewee which advises companies on their due diligence practices indicated:
We certainly hear [companies] talking about how helpful it is in conversations
with business partners to be able to point to the legislation and say: 'This is why
we're asking you to do this, this is why we need you to take it seriously. It's not
just because we're the good guys or we've got American values and whatever'.
That can be very helpful.
However, these benefits would not always be applicable to non-EU supply chains. An
interviewee from an international trade association who works with companies on their
due diligence indicated:
Most of [the] the value chains, supply chains I've been looking at, involved
countries and businesses outside of the EU. It's difficult to see how a Chinese-
owned company running a factory in Cambodia, for instance, that supplies several
big European brands, how regulation would hold these businesses to the same
standard or hold them to account. I'm not quite sure how European legislation
would do that. I'm a little suspicious of that.
However, the interviewee added:
61.19%
41.67%
90.70%
14.93%
45.83%
3.49%
23.88%
12.50%
5.81%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Businesses Industry organisations Civil society/NGOs
Agree Disagree Do not know
149
Even though, notwithstanding what I said about the ineffectiveness about a lot of
this due diligence work, some of it is down to a lack of leverage within that
sector. You get a couple of brands saying the right things but many more who are
saying nothing. They're not asking the right questions of their suppliers or
government. [We have worked] with a couple of companies trying to do the right
thing [and that] had been successful. I think it would help generate leverage
within specific sectors definitely.
The interviewee further explained:
If there [are] minimum standards in that legislation, it provides authoritative
voices so companies can then go to their suppliers and say, "Well, this
information is required by law." I could see the benefit of that, but I'm not quite
sure. If it's information, again, for the purpose of transparency, and literal
questions are being asked, yes, it would help brands.
Access to the European market 6.5
A few interviewees indicated that an EU-level regulation would be a powerful incentive
insofar as it could be linked to legal requirements for operating in or accessing the
European market. One interviewee from business indicated:
It has to be tied to if you want the benefit of selling to European consumers, this
is part of it.
Another interviewee from a multinational company indicated:
We would welcome requirements in terms of what industry should do but it needs
to come with the might of the EU in terms of its trade policy, of its development
policy, to also be part of the solution.
An interviewee from an international civil society organisation explained how these
requirements for the EU market may also indirectly lead to improved conditions in global
supply chains that are not producing for the EU market:
Many multinational companies… have EU operations and international operations.
Once they do it for the EU, they will do it for the others as well. Or if they have
suppliers for the EU they would buy it from the same suppliers for the others
[external to the EU].
As set out in the regulatory review, some of the existing due diligence measures provide
for certification of products based on human rights or environmental standards. These
are frequently coupled with import restrictions of goods into the EU. One interviewee
from a multinational steel company explained the shortcomings of the all-or-nothing
approach of trade barriers based on certification:
I am against certification. There are companies developing certification schemes
across the supply chain, for which companies have to become members and then
they certificate all your sites. Before you know it you spend a lot of money on
certification. We are not in favour of that, because the rationale for such
certification is if you’re certified you can say ‘I produce responsible steel’. But no,
it will be impossible to certify, because it is not possible to consider that one has
done a full due diligence and that everything is OK.
A few interviewees mentioned that import restrictions into the EU market based on the
existence of human rights or environmental harms would not be feasible. One reason is
because these harms are so widespread in the supply chains of all imported products.
150
One interviewee from a civil society organisation working on corporate practices
indicated:
When considering global supply chains, when doing research I can’t remember a
single case where we did not find human rights violations. The type and scope
differs but there was always something.
Another reason which was stated to explain why import restrictions based on a failure to
respect human rights would not be feasible was that it was not clear how customs
officials would be able to check for human rights abuses in the supply chain:
On the market access, it could be to say you cannot import into Europe products that
are not produced under sustainable conditions. But of course, it’s easy on
environmental aspects, let’s say maybe that toxic substances are not allowed,
because then you can check on the product, at the customs, at the import harbour.
But whether children have been involved in cocoa productions we can’t check it at
the harbour. So it’s really difficult…
The leadership of the EU 6.6
Many stakeholders emphasized the importance of having EU leadership in this area, both
within the EU as well as globally.
One transnational company based in Spain indicated, with reference to the impacts of
the EU non-financial reporting directive:
We felt that the European mandate gives some credibility … In Spain, for the last
3, 4 years, we have been struggling with changing governments. We had three
elections in one month. We have one election in three weeks. So no-one really
takes national laws as seriously anymore, in this moment when everything is so
weird. So having Europe behind and understanding that this is a European
mandate makes a big difference.
A number of interviewees referred to the beneficial spillover effects that an EU-level
regulation could have for not only rights-holders, but also European companies through
raising the standard globally. An interviewee working for a trade union association
indicated:
I think that it would spill over to others, for example the US. In a similar way to
what we’ve seen with the Bangladesh Accord, which was mostly led by EU
companies, and was followed by the US Alliance.
Another interview from a multinational company indicated:
In principle, even better than EU law would be a good treaty at the international
level basically turning the UNGPs into hard law. That would be the ideal level-
playing field. But we have to be a bit realistic and feel that a good intermediate
thing to aim for is European legislation.
An interviewee from civil society indicated:
These things are incremental. It won’t lead to an overnight change, as we know,
but gradually you begin to change the dynamic. So if we put these standards in
place here … At some point there will be a different administration in place in the
US, so then you have a change there, you have a change in places like Canada,
Australia, and things begin to shift. So obviously it’s slow.
151
They added an important point about the EU’s leadership on these issues:
Another benefit that I could see, and would hope that this would be important to
the Commission, is the European Union’s commitment to human rights, and its
leadership on human rights, which given the situation in the States at the minute,
is more important than ever.
The other one would be around the challenges that are going on to globalisation
within the European Union. Obviously there are more effective standards in the
EU, but there are still human rights abuses in business operations in the
European Union, and if this could help European Union citizens and other people
who are in the European Union, who are non-citizens, migrant workers
particularly. And I think that’s important. I think as the European Union tries to
rediscover what it’s about, that kind of leadership is crucial really. Because one of
the main criticisms of [the European Union] is that it’s been very good for
business and it’s been very good for markets, and the social aspects have been
kind of left behind. And if you are going to tackle populism head-on, then these
are the kinds of things that the European Union needs to be doing.
An interviewee from civil society indicated:
In our campaign we make the comparison that, for us, it’s a no-brainer that
products should be safe for consumers. And we have very strong regulation on
product safety. And similarly it should be a no-brainer that human rights should
not be infringed on in the making of those products.
7. Conclusions: Market Practices
The following observations can be made from a study of the above market practices.
Just over a third344 of business respondents are undertaking due diligence which takes
into account all human rights and environmental impacts, and a further third345
undertake due diligence only in certain areas.346 Similar trends reflect amongst large
companies with over 1000 employees, but survey results suggest that current due
diligence practices are slightly less established within SMEs.
However, the majority347 of business respondents who undertake due diligence indicated
that third party impacts are included for first tier suppliers only. Current due diligence
practices beyond the first tier and for the downstream value chain are significantly lower
by comparison.348
The vast majority of business stakeholders expressly include environmental impacts in
their due diligence, and many others view environmental impacts as implied. Although
survey respondents indicated that the term “climate change due diligence” is currently
rarely used as a self-standing form of due diligence, business respondents indicated that
environmental impacts including aspects of climate change, air pollution and greenhouse
gas emissions are viewed by business survey respondents as included, either expressly
or implied, within existing due diligence processes. However, due diligence for climate
change may currently often take place in other different parts or the team of the
company, resulting in a “silo”-ing effect. As a result of very recent developments, there
344 37.14%. 345 33.71%. 346 For example health and safety, labour, non-discrimination and equality, environmental, land rights and indigenous
communities. 347 51.82%. 348 Selected by 16.06% each.
152
seems to be a growing acknowledgement that climate change impacts are to be viewed
within the company’s own due diligence responsibilities.
The majority of business respondents indicated that income inequality is either expressly
included349 or implied in their due diligence.350 Profit-shifting to lower tax jurisdictions is
implied as included in almost three quarters of companies’ due diligence,351 and
expressly included in a quarter.352
The terminology most frequently selected by business353 and general stakeholder
respondents354 is “human rights due diligence”. Other common terms are “sustainability
due diligence” and “social, environmental and human rights due diligence”. The phrase
“climate change due diligence”, which was the least selected phrase in both surveys,355
suggesting that self-standing processes which focus exclusively on climate change are
rare.
Stakeholders suggested that any regulatory mechanism should build upon the influence
and strength of the due diligence concept of the UNGPs. The OECD Guidelines were
frequently mentioned as an example of how the UNGPs concept of due diligence can be
expanded and applied to other areas of responsible business conduct, as many
references were made to the usefulness of the OECD sectoral guidance.
Business respondents indicated that the most frequently used actions which companies
currently undertake to prevent, mitigate or remedy the adverse human rights and
environmental impacts of their own operations are training on human rights or
environmental impacts and contractual clauses and codes of conduct,356 followed closely
by audits.357 Contractual clauses and codes of conduct, and audits, respectively, were
also the top two actions for due diligence in the upstream and downstream supply chain.
General stakeholders also selected contractual clauses and codes of conduct,358 followed
by audits,359 as the actions which companies take for their due diligence practice,
revealing a genuine understanding of the real due diligence practices of companies
among general stakeholders.
Divestment was the least selected due diligence action by both business and general
respondents in both the upstream and downstream supply chain. Stakeholders made
frequent reference to the concept of leverage, including the challenge of a lack of
leverage. Traceability and a lack of transparency is a major challenge for companies
aiming to undertake supply chain due diligence.
Stakeholders also mentioned that due diligence in this context requires the company to
go beyond the risks to the company to focus on the risks to those external rights or
interests affected (the “rights-holders”). Stakeholders highlighted that buying practices,
including price, are a major contributor to adverse impacts in the supply chain, and that
current grievance mechanisms often fall short for the purposes of identification and
remediation of impacts.
349 54.76%. 350 45.24%. 351 74.15%. 352 25.8%. 353 32.43%. 354 54.10%. 355 Only 1.35% of business respondents and only 6.56% of general respondents use this phrase. 356 Both at 69.01%. 357 67.61%. 358 61.76%. 359 60.29%.
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When asked about what the primary incentives for undertaking due diligence is, or have
been, business respondents and industry organisations selected the same top three
incentives in the same order: Reputational risks,360 investors requiring a high
standard,361 and consumers requiring a high standard.362 This demonstrates that despite
some divergence in views on regulatory options between these two groups (see below),
industry organisations have a real understanding of the risks and incentives which drive
business to undertake due diligence.
The four least selected incentives by business respondents were related to regulation or
legal requirements.363 It is notable that these are the incentives related to regulation or
legal requirements. Industry organisations placed a similarly low value on the ability of
regulatory measures to incentivize due diligence.364 In contrast, general stakeholders365
and civil society respondents366 placed a much higher value on the role of regulation and
legal risks to incentivize due diligence than business do.
Overall, the majority of stakeholders interviewed and surveyed considered existing laws
on due diligence requirements for human rights and environmental impacts not to be
effective, efficient and coherent. Moreover, the majority of general survey
respondents367 indicated that the current legal landscape does not provide companies
with legal certainty about their human rights and environmental due diligence
obligations.
Most interviewees were in principle in favour of a policy change to introduce a general
standard at the EU level, although they differed on aspects of liability and methods of
enforcement. However, industry organisation survey respondents were overall not in
favour of the introduction of new policy changes, including mandatory due diligence.
Regarding regulatory Option 2, all interviewees across business and other stakeholders
agreed that there is already enough voluntary guidance in existence. Similarly, survey
respondents overall seemed unconvinced that new voluntary guidance would have
notable social, environmental and human rights impacts. However, it is noted that when
asked about the effectiveness of existing and possible future regulatory models, survey
respondents from industry organisations had a preference for voluntary guidelines,
drawing attention to the influential nature of those soft law mechanisms already in
existence.
Interviewees indicated that voluntary guidance could be helpful to supplement any legal
obligations. Several interviewees also highlighted that, due to the nature of due
diligence, existing voluntary guidance will influence the standard of due diligence that
would be expected of companies under each specific circumstance.
360 66.19% for business respondents, 65.52% for industry organisations. 361 51.08% for business respondents, 55.17% for industry organisations. 362 46.76% for business respondents, 55.17% for industry organisations. 363 Regulation which allows for sanctions or fines (33.81%), standards required for export credit or procurement contracts
(25.90%), regulation which allows for judicial oversight over steps taken (21.58%) and risk of litigation by those affected
(20.14%). Thereafter, the other legal-related incentives followed: risks of litigation by those affected (53.57%), regulation
which allows for judicial oversight over steps taken (52.38%), regulation requiring reporting on steps taken (48.21%) and
standards required for export credit or procurement contracts (45.83%). 364 The four least selected incentives by industry organisations were regulation requiring reporting on steps taken (31.03%),
risk of litigation by those affected (20.69%), regulation which allows for sanctions / fines (17.24%) and regulation which
allows for judicial oversight over steps taken (10.34%). 365 More than two thirds (67.86%) of general respondents viewed regulation which allows for sanctions or fines as the highest incentive for companies to undertake due diligence. This was followed by investors requiring a high standard (62.50%),
financial risks (60.71%), reputational risks (58.33%). 366 As many as 87.10% selected regulation which allows for sanctions or fines as the top incentive, followed by regulation
which allows for judicial oversight over steps taken (69.89%), and risk of litigation by those affected (66.67%). Reputational
risk was selected by only 50.54% of civil society stakeholders for incentivizing corporate due diligence, despite being the top
incentive for both business and industry organisation respondents. 367 78.57%.
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Regarding regulatory Option 3, survey respondents were more positive about the likely
sustainability impacts of regulatory reporting requirements than with new voluntary
guidance. However, interviews echoed the shortcomings of reporting requirements
documented in the literature, particularly insofar as they do not usually provide for
sanctions for non-compliance with the reporting requirement, and do not require
substantive due diligence. It was nevertheless highlighted that reporting requirements
have had a positive impact in raising awareness and the internal conversations within
companies. It was also noted that some reporting requirements, such as the EU NFRD,
are relatively new and there has not been an opportunity to fully observe their impacts
on corporate due diligence activities.
Regarding regulatory Option 4, stakeholders indicated that mandatory due diligence is
the regulatory options which is likely to have the most social, environmental and human
rights impacts of all the options. The majority of interviewees supported the introduction
of a general requirement at EU level which would require companies to undertake
mandatory due diligence in their own operations and throughout their supply chains.
However, interviewees differed with respect to liability and the enforcement method for
implementation.
Reasons for support for such a mandatory due diligence duty at EU level, as stated by
business interviewees included the levelling of the playing field, a single harmonized
standard, and legal certainty. Reasons for support stated by civil society interviewees
included higher levels of implementation of due diligence, prevention of human rights
and environmental harms, and access to remedies for those affected. Other benefits
discussed by stakeholders in relation to the introduction of a due diligence measures
included facilitating leverage with third parties by setting a non-negotiable standard,
access to the European market, and the leadership of the EU.
Large companies or multinationals have a preference for a cross-sectoral standard which
would level the playing field, but which is applied in a way that takes into account the
sectoral particularities. In contrast, industry organisations, which represent a broader
range of business than only multinationals, have a preference for regulation which is
industry-specific. A low percentage of industry organisations are in favour of cross-
sectoral regulation which applies to all companies regardless of size, which was the first
choice for civil society stakeholders.
Both business respondents and civil society respondents had a marked preference for
cross-issue regulation which applies to all EU-recognised human rights and
environmental impacts. In contrast, industry organisations preferred issue-specific
regulation, for example covering only issues of child labour or modern slavery.
There was an overall preference for regulation which applies to all companies regardless
of size amongst business and general stakeholder respondents, although some
stakeholder disagreed strongly with this preference, and comments in optional text
boxes emphasised concerns about the creation of a burden for SMEs. Some interviewees
noted that small companies may have proportionately less risks and accordingly be
expected to have less sophisticated processes than larger companies.
Relating to the perceptions of the impacts and effectiveness of mandatory due diligence,
our survey suggested a direct contradiction between the views of large multinational
companies and industry organisations. Survey findings and business interviews
confirmed the recent trends displayed in the literature and public domain that
multinational companies in particular seem to support and even call for mandatory due
diligence regulation both at EU and Member State level. Reasons behind this support are
stated to be the creation of a level playing field and legal certainty, two issues which
particularly affect multinational companies operating across borders. Evidence of this
business support is also discussed further in the Regulatory Review, where business
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have supported or are supports the campaigns for mandatory due diligence in certain
Member States or national jurisdictions.
In contrast, the majority of industry organisation survey respondents were generally
opposed to a policy change, in including mandatory due diligence regulation. As such,
the views of multinational companies seemed to be more aligned with those of civil
society and other general stakeholders than with industry organisations on certain key
questions.
Also in relation to enforcement, the views of industry organisation survey respondents
differ from other stakeholder groups insofar as industry organisation respondents seem
to have a preference for regulation with no or the least amount of enforcement. On
contrast, interviewees from across the remainder of stakeholders, including interviewees
from multinational companies, confirmed the importance of enforcement for the
purposes of effectively levelling the playing field. However, it is noted that interviewees
from multinational companies did not always agree with the views of other stakeholder
group interviewees regarding liability regimes and methods of enforcement.
Interviewees highlighted the importance of the use of a standard of care requirement as
it would require companies to implement steps which work to prevent and mitigate
human rights risks, rather than simply create processes. Many stakeholders, including all
interviewees, emphasized that the standard of care should be flexible so as to take into
account the specific context of each specific company, including its sector. Stakeholders
across the spectrum agreed that companies should be able to escape liability if they are
able to demonstrate that they have, in fact, undertaken the due diligence required in the
circumstances.
A few interviewees stressed the importance of introducing a regulatory standard within
the company law framework, which engages the responsibilities of the Board. Many
stakeholders indicated that mandatory due diligence fits in with the “smart mix” of
measures which is required to affect real change. Several stakeholders suggested that
there would need to be a transitional period for any regulation.
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III. REGULATORY REVIEW
1. Introduction
This section sets out the Regulatory Review carried out in accordance with Task 2 of the
TOR.
2. Methodology
This section reviews the regulatory framework applicable to due diligence in the EU as
well as in 12 selected Member States (including the UK) with respect to due diligence for
human rights and environmental impacts in companies' own operations and through
their supply chains. These particular Member States have been identified as States
where there has been some regulation or other engagement by governments in the area
of due diligence through the supply chain.
The country reports for this study are included in the annex Part III Country Reports.
The country reports have been prepared by legal experts with expertise relating to due
diligence in the relevant jurisdiction. Country experts were asked to provide their
information regarding relevant and related forms of due diligence, from due diligence for
specific human rights impacts and environmental impacts, to due diligence for other
sustainability and governance issues. Country reports include information on legislation
and other forms of regulation at national level, as well as draft legislation and regulatory
proposals put forward in relevant Member States, with a particular interest in the legal
models and implications of due diligence regulation. Country reports set out, where
relevant, relevant industry standards, case law, and literature which provide examples of
due diligence requirements for operations and supply chains. We thank our expert
rapporteurs for their hard work and invaluable insights in their reports.
Before turning to the in-depth findings of the country reports, the section provides an
overview of the concept of due diligence and relevant developments at international and
EU level.
3. The concept of due diligence
The concept of due diligence referred to in the TOR and European Parliament report368
which provides the mandate for this study was first introduced by the UN Guiding
Principles on Business and Human Rights (“UNGPs”).369 It has since been incorporated
into various other standards discussed in this study, including the OECD Guidelines
(“OECD Guidelines”).370
Different legal systems within the EU use different terminology to refer to due diligence
in relation to human rights and environmental matters, which might create some
confusion.371 In particular, the common law systems often rely on the concept of duty of
368 European Parliament Report on Sustainable Finance, (2018/2007(INI)), 4 May 2018, available at:
http://www.europarl.europa.eu/doceo/document/A-8-2018-0164_EN.html, at para 6. 369 UN Office of the High Commissioner for Human Rights (“OHCHR”) “Guiding Principles on Business and Human Rights:
Implementing the ‘Protect, Respect and Remedy’ Framework”, HR/PUB/11/04, 2011 (“UNGPs”), available at:
https://www.ohchr.org/documents/publications/GuidingprinciplesBusinesshr_eN.pdf. 370 OECD Guidelines for Multinational Enterprises 2011, available at: https://www.oecd.org/corporate/mne/. See also the OECD
“OECD Guidelines for Multinational Enterprises: Responsible Business Conduct Matters” (“OECD RBC Guidance”), available at:
http://mneguidelines.oecd.org/MNEguidelines_RBCmatters.pdf, and the 2017 OECD Guidelines for Responsible Business
Conduct for Institutional Investors, available at: https://mneguidelines.oecd.org/RBC-for-Institutional-Investors.pdf and
mentioned in para 11 of the European Parliament report above n 368. 371 Andreas Rühmkorf and Lena Walker, “Assessment of the concept of 'duty of care' in European legal systems for Amnesty
International”, European Institutions Office, September 2018.
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care, which “refers to the circumstances and relationships giving rise to an obligation
upon a defendant to take proper care to avoid causing some form of foreseeable harm to
the claimant in all the circumstances of the case in question”.372 The term "vigilance"
used in the French Duty of Vigilance law “has much more specific, codified conditions
than the very general duty of care".373
However, the concept of human rights due diligence, which has gained a wide
acceptance at the international level since the UNGPs resonates with existing standards
both in civil law and common law systems, and "may be used to clarify these standards'
application in the context of complex corporate structures and value chains".374
John Ruggie referred to due diligence as the principle of “do no harm”,375 which is a
common principle in all legal systems, common law or civil, across the EU and indeed the
world. In this sense, it describes the process, or rather a “bundle of interrelated
processes”,376 through which businesses can identify, prevent, mitigate and account for
their actual and potential adverse human rights impacts.377
In other areas of law, due diligence is also used as a legal standard of care. It is noted
that the European Parliament report in response to the Action Plan on Sustainable
Finance referred to a “mandatory due diligence framework including a duty of care”. In
this study, mandatory due diligence as a duty of care will be understood within the
meaning of the legal duty or standard of care.
In this way, the term “duty of care” should be distinguished from:
the phrase “duty of care” as it is used in the English tort law cases (discussed in
the Regulatory Review) relating to parent company liability (for example, where
claimants have to demonstrate that the parent company owed a duty of care to
those affected by the activities of the subsidiary); and
the phrase “duty of care” as it relates to the fiduciary or other duties which an
individual director owes to a company in terms of company law.
Robert McCorquodale and Jonathan Bonnitcha have argued that the use of the term “due
diligence” in the UNGPS was deliberately chosen to build a consensus, as it is a phrase
familiar to business people, lawyers and States.378 However, they argue that the
meaning of due diligence as a process to manage business risk, 379 as it is understood in
the traditional business context, differs from the meaning of due diligence as a legal
standard of care, which is expected of a duty bearer to discharge an obligation.380 In the
UNGPs, human rights due diligence refers interchangeably to a process and a standard
of care expected of companies to meet their responsibility to respect.381
372 Lexis Library, Glossary. 373 Rühmkorf and Walker above n 371 at 5. 374 Ibid. 375 Ruggie summarises the corporate responsibility to respect as “put simply, to do no harm”. UN Human Rights Council,
“Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations
and other business enterprises: ‘Protect, Respect and Remedy: a Framework for Business and Human Rights’”, A/HRC/8/5 (7
April 2008), at para 24; UN Human Rights Council, “Report of the Special Representative of the Secretary-General on the issue
of human rights and transnational corporations and other business enterprises: Clarifying the Concepts of ‘Sphere of Influence
and Complicity’”, A/HRC/8/16 (15 May 2008), at para 3. 376 UN Working Group on the issue of human rights and transnational corporations and other business enterprises, "Corporate human rights due diligence – emerging practices, challenges and ways forward", A/73/163 (16 July 2018), at para 10. 377 UNGP 17. 378 Jonathan Bonnitcha and Robert McCorquodale, ”The Concept of 'Due Diligence' in the UN Guiding Principles on Business and
Human Rights”, 28 European Journal of International Law, 2017 899 at 900. 379 Ibid. 380 Ibid. 381 Ibid.
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3.1 Due diligence as a legal standard of care
The concept of due diligence as a standard of care originated from Roman law,382 where
it was used as an objective standard of expected conduct both in contract law and in the
law of tort. In particular, a wrongdoer would be held liable for acts of negligence if he or
she had failed to comply with the standard of conduct which would have been exercised
in the circumstances by the diligent paterfamilias (i.e. prudent father of family/ head of
the household), which would then become known in common law as the ordinary
reasonable person standard.383 Although terminologies vary, this principle that a person
should exercise a certain standard of care in order not to harm another is still commonly
recognized in legal systems across EU Member States.384
Since Roman law, due diligence has remained a context-specific concept,385 and the
standard of conduct against which fault could be assessed depended on the particular
facts of the case. Roman lawyers used the example of a farmer burning stubble in his
fields: If it is a quiet day and the farmer watches the fire diligently, then he could be
said to meet the expected standard of conduct. However, the farmer would be liable for
the damage to his neighbour's crops if he had burnt the stubble in his fields on a windy
day and was unable to control the fire as a result.386
In international law, due diligence has played an important role in the responsibility of
States for private actors.387 It refers to an obligation of conduct rather than obligation of
result which means that the primary focus is on the behaviour of the duty bearer rather
than on the outcome of that behaviour.388 The Max Planck Encyclopaedia of Public
International Law defines due diligence as “an obligation of conduct on the part of a
subject of law”, the breach of which does not consist in “failing to achieve the desired
result” but rather in “failing to take the necessary, diligent steps towards that end”.389 As
such, due diligence tends to inquire whether a State has taken reasonable and
appropriate steps to prevent or mitigate breaches of international law by private
persons.390
The concept of due diligence allows for a flexible approach to performance preserving a
significant measure of autonomy and flexibility for the duty bearers in discharging their
obligation.391 Further elaboration is provided on the concept of due diligence in the “Due
diligence as a legal standard of care: Clarification of a few common questions”
subsection of the Problem Analysis and Regulatory Options section.
3.2 Developments in due diligence
3.2.1 UN Guiding Principles on Business and Human Rights
As mentioned previously, the origin of the concept of due diligence for the purposes of
this study is UNGPs. The UNGPs emerged as result of extensive stakeholder consultation
382 Ibid at 902. 383 John Jefferson Bray, ”Possible Guidance from Roman Law” (1968) Adelaide Law Review 145 at 150. 384 See the Country Reports as well as Cees van Dam “Tort Law and Human Rights: Brothers in Arms
On the Role of Tort Law in the Area of Business and Human Rights” (2011) 2 JETL 221 at 237. 385 Lise Smit, Arianne Griffith, Robert McCorquodale, ”When national law conflicts with international human rights standards:
Recommendations for Business”, BIICL Business Network, available at : https://www.biicl.org/projects/when-national-law-
conflicts-with-international-human-rights-standards at 14. 386 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition, Oxford University Press (1996) at 1007. 387 Timo Koivurova, “Due Diligence”, in Rüdiger Wolfrum (ed.), Max Planck Encyclopaedia of Public International Law (2010), at
para 3. 388 ILA Study Group on Due Diligence in International Law, Second Report, July 2016, at 2. 389 Koivurova above n 387 at para 3. 390 ILA Report above n 388 at 3. 391 Ibid at 2.
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by the Special Representative on Business and Human Rights, John Ruggie,392 and
constitute “a globally recognized and authoritative framework” for preventing and
addressing adverse human rights impacts resulting from business activities”.393 The
UNGPs were unanimously endorsed by the UN Human Rights Council in June 2011 and
endorsed by the EU in 2011.394 The UNGPs are organised around three pillars: the State
duty to protect human rights; the corporate responsibility to respect human rights; and
access to remedy for victims of business-related human rights abuses.
The UNGPs set out the corporate responsibility to respect human rights which, under
Guiding Principle 13, requires business enterprises to avoid causing or contributing to
adverse human rights impacts through their own activities, and address such impacts
when they occur, but also to seek to prevent or mitigate adverse human rights impacts
that are directly linked to their operations, products or services by their business
relationships.
The UNGPs state that in order to meet their responsibility to respect human rights,
business enterprises should carry out human rights due diligence (“HRDD”).395 HRDD
should “identify, prevent, mitigate and account for”396 actual or potential adverse human
rights impacts a company may be involved in through its own activities or business
relationships. The Commentary to Guiding Principles 17 further clarifies:
Potential impacts should be addressed through prevention or mitigation, while
actual impacts – those that have already occurred – should be a subject for
remediation…
In its Interpretive Guide on the corporate responsibility to respect human rights, the UN
Human Rights Office of the High Commissioner defined human rights due diligence in the
context of the UNGPS as comprising:397
[A]n ongoing management process that a reasonable and prudent enterprise
needs to undertake, in light of its circumstances (including sector, operating
context, size and similar factors) to meet its responsibility to respect human
rights.
The UN Working Group on the issue of human rights and transnational corporations and
other business enterprises (“the UN Working Group”) notes that:398
Since the endorsement of the Guiding Principles by the Human Rights Council in
2011, corporate human rights due diligence has become a norm of expected
conduct.
Important concepts relating to due diligence for this study are:
The UNGPs refer to the value chain (not the supply chain), which refers to the
entire life cycle of the product or service, and includes other business partners
392 John Ruggie, Just Business, Norton (2013) at 141-148. 393 UN Working Group above n 376 at para 1. See also Shift Project, “UN Guiding Principles on Business and Human Rights”,
available at: https://www.shiftproject.org/resources/publications/un-guiding-principles-on-business-and-human-rights/. 394 Responsible Business Conduct Working Group, Shadow EU Action Plan on the Implementation of the UN Guiding Principles on Business and Human Rights within the EU, March 2019, available at: https://responsiblebusinessconduct.eu/wp/wp-
content/uploads/2019/03/SHADOW-EU-Action-Plan-on-Business-and-Human-Rights.pdf. 395 UNGP 15-21. 396 UNGP 15. 397 OHCHR, The Corporate Responsibility to Respect Human Rights: An Interpretive Guide, HR/PUB/12/02 (2012), available at:
https://www.ohchr.org/Documents/Publications/HR.PUB.12.2_En.pdf at 4. 398 UN Working Group above n 376 at para 20.
160
than suppliers.399
For the purposes of this study stakeholders were asked
questions about both the upstream supply and the downstream value chain.
The UNGPs expect companies to undertake HRDD for “adverse human rights
impacts that the business enterprise may cause or contribute to through its own
activities, or which may be directly linked to its operations, products or services
by its business relationships”.400
The concept of leverage is used to determine whether the company has taken
“appropriate action” in circumstances where it contributes to, may contribute to,
or may be directly linked to adverse impacts. Leverage is “considered to exist
where the enterprise has the ability to effect change in the wrongful practices of
an entity that causes a harm”.401
The UNGPs are clear that HRDD should be ongoing (not once-off / pre-
transactional),402 should be context-specific (not a one-size fits all tick-box, but
tailored to correspond with the size of the company, risks of severe impacts, the
nature and context of operation),403
and should cover all human rights, although
certain human rights may be prioritised over others based on severity of risks.404
Risks should be defined as risks to rights-holders (i.e. the people affected), and
not just on the risks to the company.405 This requires an important departure
from current / traditional risk analysis processes.
The UNGPs identify four essential components of due diligence:
1) identifying and assessing actual and potential human rights impacts
2) integrating and acting upon the findings
3) tracking the effectiveness of actions taken; and
4) communicating how impacts are addressed.406
The UN Working group on the issue of human rights and transnational corporations and
other business enterprises has also specified that the human rights due diligence
processes need to be complemented by an active engagement in the remediation of
adverse human rights impacts caused or contributed to by the enterprise.407
The influence of the UNGPs is evident in the widespread adoption and use of the concept
and terminology of due diligence as the standard of care expected of companies for their
human rights and environmental impacts, including in international standards such as
the OECD Guidelines for Multinational Enterprises (and latest OECD Guidelines on Due
Diligence for Responsible Business Conduct),408 and in regulatory developments and
399 UNGP 13 and its Commentary. In this study, we refer to value chain with respect to the upstream and downstream supply
chain, in accordance with the TOR. However, it is noted that in certain contexts the value chain may also be understood to
include further business relationships that are not part of the life-cycle of the product, such as governments which issue
licenses / concessions. 400 UNGP 17. 401 Commentary to UNGP 19. 402 Ibid. 403 Commentary to UNGP 17. 404 UNGP 17 and its Commentary. 405 Protect, Respect and Remedy Framework above n 375 at para 6. 406 UNGP 17. 407 UN Working Group above n 376 at para 10. 408 OECD Guidelines above n 370.
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proposals such as the French Duty of Vigilance Law, the Swiss Responsible Business
initiative and parliamentary counter-proposal for mandatory due diligence,409 the
unofficial outline setting out draft for a German mandatory due diligence law,410 and
corporate reporting standards such as the UNGPs Reporting Framework,411 and multiple
corporate reports,412 investment benchmarks such as the Corporate Human Rights
Benchmark,413 and the work of the Office of the UN High Commission for Human
Rights.414
The UNGPs have also been influential on policy developments in the context of the
International Labour Organisation, for instance through the references to due diligence
in line with the UNGPs in the 2016 Resolution concerning decent work in global supply
chains,415 and the recent revision of the ILO Tripartite declaration of principles
concerning multinational enterprises and social policy (MNE Declaration),416 as well as in
the G20 (e.g. in the 2017 Leaders' Declaration on Sustainable Global Supply Chains,417
and 2017 Declaration of Labour and Employment Ministers on fostering decent work in
sustainable global supply chains) and of G7 (e.g. 2019 Labour and Employment
Ministers' Communiqué and the Ministers on Commitments to Promote Responsible
Business Conduct in Global Supply Chains).418
Andreas Rühmkorf and Lena Walker write:419
[Human rights due diligence] is the term that is more common in international
soft law; it has its origins in the UN Guiding Principles and is used by the OECD. It
is a concept that has gained wide acceptance at the international level… [Due
diligence] resonates with existing standards of duty of care in tort law and
comparable concepts in civil law. It may be used to clarify these standards’
application in the context of complex corporate structures and value chains.420
3.2.2 OECD Guidelines for Multinational Enterprises
The OECD Guidelines for Multinational Enterprises,421 revised in 2011 to align with the
UNGPs,422 and its guidance on Responsible Business Conduct incorporate a similar
standard of due diligence as that set out in the UNGPs.423 For the purposes of our study,
the OECD Guidelines are particularly relevant insofar as they extend the concept of due
409 See BHRinLaw “Switzerland”, available at: http://www.bhrinlaw.org/key-developments/64-switzerland. 410 Business and Human Rights Resource Centre (“BHRRC“), “German Development Ministry drafts law on mandatory human
rights due diligence for German companies”, available at: https://www.business-humanrights.org/en/german-development-
ministry-drafts-law-on-mandatory-human-rights-due-diligence-for-german-companies. It is noted that the German Federal Government recently issued a statement stressing that the document merely constitutes "internal considerations“ within the
German Federal Ministry for Industrial Cooperation and Development ("BMZ"), https://www.bundestag.de/presse/hib/670510-
670510. 411 Shift and Mazars, “The UN Guiding Principles Reporting Framework”, available at: https://www.ungpreporting.org/. 412 See, for example, Unilever, Human Rights Progress Report, 2017, available at: https://www.unilever.com/Images/human-
rights-progress-report_tcm244-513973_en.pdf; Nestlé, United Nations Guiding Principles Reporting Framework, 2017,
available at: https://www.nestle.com/asset-library/documents/library/documents/corporate_social_responsibility/ungprf-
index-of-answers-2017.pdf. 413 Corporate Human Rights Benchmark, available at: https://www.corporatebenchmark.org/. 414 For example, see the OHCHR “Accountability and Remedy Project: Improving accountability and access to remedy in cases
of business involvement in human rights abuses”, available at:
https://www.ohchr.org/EN/Issues/Business/Pages/OHCHRaccountabilityandremedyproject.aspx 415 International Labour Organisation (“ILO”), Resolution concerning decent work in global supply chains, adopted on 10 June
2016. 416 ILO, Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, adopted by the Governing
Body of the International Labour Office at its 204th Session (Geneva, November 1977) and amended at is 279th (November
2000), 295th (March 2006) and 329th (March 2017) Sessions (“ILO MNE Declaration”). 417 G20 Leaders' Declaration: Shaping an interconnected world, Hamburg, 7/8 July 2017. 418 Outcome of the G7 Labour & Employment Ministerial 2019, Paris 13 June 2019, 419 Rühmkorf and Walker above n 371. 420 Ibid. 421 OECD Guidelines above n 408. 422 John Ruggie and Tamaryn Nelson, “Human Rights and the OECD Guidelines for Multinational Enterprises: Normative
Innovations and Implementation Challenges“, Corporate Social Responsibility Initiative Working Paper No. 66 (May 2015), at
13. 423 Due diligence was incorporated into the OECD Guidelines above n 370 as part of the 2011 revision.
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diligence expressly to other areas of responsible business conduct, including
environment and climate change, as well as risks related to conflict, labour rights,
bribery and corruption, disclosure and consumer interests. For the launch of the OECD
Due Diligence Guidance on Responsible Business Conduct, John Ruggie described the
revised OECD Guidelines as “the first [inter-governmental instrument] to take the
Guiding Principles’ concept of risk-based due diligence for human rights impacts and
extend it to all major areas of business ethics”.424
The OECD due diligence responsibilities also apply to the supply chain,425 and the OECD
has produced detailed supply chain due diligence guidance for certain sectors: conflict
minerals,426 the agricultural sector,427 the garment and footwear sector,428 institutional
investors,429 multi-stakeholder engagement in the extractive sector,430 and export credit
agencies.431 Stakeholders in our study (in the Market Practices section) have confirmed
that the OECD guidance and the UNGPs go hand in hand for the purposes of defining and
concretizing the due diligence framework on which companies rely for their policies and
processes.
The OECD Guidelines also require OECD member states to set up National Contact Points
(“NCPs”), to which complaints may be made that a company is in breach of the OECD
Guidelines.432 A key development in developing an understanding of climate change due
diligence in practice has been the case against ING before the Dutch NCP, discussed
elsewhere in this study.
It is noted that although the OECD Guidelines cover tax, this Chapter does not refer to
due diligence.433 Instead, it states that "enterprises should comply with both the letter
and spirit of the tax laws and regulations of the countries in which they operate”.434 The
OECD Due Diligence Guidance for Responsible Conduct further confirms that due
diligence does not apply to matters of taxation.435
3.2.2.1 The OECD Guidelines and Climate Change Due Diligence
In light of the scope of this study, it is particularly helpful to consider the provisions of
the OECD Guidelines relating to climate change. The OECD Guidelines provide that:
[E]nterprises should, within the framework of laws, regulations and
administrative practices in the countries in which they operate, and in
consideration of relevant international agreements, principles, objectives, and
standards, take due account of the need to protect the environment, public health
and safety, and generally to conduct their activities in a manner contributing to
the wider goal of sustainable development.436
The OECD Guidelines add that, in particular, enterprises should establish:
424 OECD RBC Guidance above n 370 at 5. 425 OECD Guidelines above n 370 Commentary on General Policies at para 14. 426 OECD, Due Diligence Guidance for Responsible Supply Chain of Minerals from Conflict-Affected Areas, 2016. 427 OECD-FAO, Guidance for Responsible Agricultural Supply Chains, 2016. 428 OECD, Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector, 2017. 429 OECD Responsible Business Conduct for Institutional Investors: Key Considerations for due diligence under the OECD
Guidelines for MNEs, 2016. 430 OECD Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractive Sector, 2017. 431 OECD Working Party on Export Credits and Credit Guarantees Recommendation of the Council on Common Approaches for
Officially Supported Export Credits and Environmental and Social Due Diligence, April 2016. 432 Any individual or organisation with a legitimate interest in the matter can submit a case to an NCP regarding a company operating in or from the country of the NCP which has not observed the Guidelines. NCPs provide a mediation and conciliation
platform to resolve such disputes concerning the OECD Guidelines. 433 OECD Guidelines above n 370 Commentary on General Policies at para 14. 434 Section XI Taxation of the OECD Guidelines ibid at 60. 435 OECD Guidelines above n 370 Commentary on General Policies at para 14 specifies that the due diligence recommendation
of the Guidelines do not apply to the chapters on Science and Technology, Competition and Taxation. 436 OECD Guidelines above n 370, Section VI Environment.
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[M]easurable objectives and, where appropriate, targets for improved
environmental performance and resource utilisation, including periodically
reviewing the continuing relevance of these objectives; where appropriate,
targets should be consistent with relevant national policies and international
environmental commitments.437
In addition, the OECD Guidelines provide that enterprises should continually seek to
improve corporate environmental performance, at the level of the enterprise and, where
appropriate, of its supply chain, by encouraging activities such as, for instance: 438
[D]evelopment and provision of products or services that have no undue
environmental impacts; are safe in their intended use; reduce greenhouse gas
emissions; are efficient in their consumption of energy and natural resources; can
be reused, recycled, or disposed of safely.
The Commentary on the Environment of the OECD Guidelines explains, concerning
"sound environmental management", that it should be interpreted “in its broadest sense,
embodying activities aimed at controlling both direct and indirect environmental impacts
of enterprise activities”.439
The Commentary further states that:
The basic premise of the Guidelines is that enterprises should act as soon as
possible, and in a proactive way, to avoid, for instance, serious or irreversible
environmental damages resulting from their activities.440
In addition, article 4 of the OECD Guidelines also echoes the precautionary principle441
by specifying that:
Consistent with the scientific and technical understanding of the risks, where
there are threats of serious damage to the environment, taking also into account
human health and safety, not use the lack of full scientific certainty as a reason
for postponing cost-effective measures to prevent or minimize such damage.
Furthermore, the OECD Guidelines encourage:442
[D]isclosure or communication practices in areas where reporting standards are
still evolving such as, for example, social, environmental and risk reporting. This
is particularly the case with greenhouse gas emissions, as the scope of their
monitoring is expanding to cover direct and indirect, current and future,
corporate and product emissions; biodiversity is another example.
These provisions formed the basis of a specific instance against the financial institution
ING before the Dutch OECD National Contact Point (NCP) in relation to the company's
climate policy.443 The parties submitting the notification requested that ING identified
and published its total carbon footprint, including its indirect greenhouse gas emissions
(as a result of its loans and investments) and established objectives to align its indirect
437 Ibid at article 1.b. 438 Ibid at article 6. 439 OECD Guidelines ibid, Commentary on the Environment at para 69. 440 Ibid. 441 Discussed below under the subsection entitled “Environmental due diligence”. 442 OECD Guidelines ibid, Commentary on Disclosure, Section III. 443 Netherlands National Contact Point for the OECD Guidelines, Final Statement, Oxfam Novib, Greenpeace Netherlands,
BankTrack and Friends of the Earth Netherlands (Milieudefensie) versus ING, 19 April 2019, available at:
file:///C:/Users/User/Downloads/190419-Final+Statement+NGOs-vs-ING.pdf.
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emissions with the objectives of the Paris Agreement on climate change.444 In its final
statement, the NCP clarified concrete ways in which companies’ individual due diligence
actions can include targets to address climate change. In particular, the NCP observed
that:445
[T]he OECD Guidelines demand that ING, and other commercial banks, put effort
into defining, where appropriate, concrete targets to manage its impact towards
alignment with relevant national policies and international environmental
commitments. Regarding climate change, the Paris Agreement is currently the
most relevant international agreement between states, a landmark for climate
change.
Following the NCP procedure, the parties came to an agreement whereby ING committed
itself to steer its lending portfolio towards meeting the Paris Agreement's goal well-below
2 degrees, and to set and publish intermediate targets.446 The final statement issued by
the NCP constitutes the first ever NCP case related to climate change due diligence, and
is to date the only one.
3.2.3 The ILO Tripartite Declaration of Principles concerning
Multinational Enterprises and Social Policy (ILO MNE
declaration)
The MNE Declaration was adopted by the Governing Body of the ILO in 1977, and
amended several times.447 It is the only global instrument in this field which was jointly
elaborated and adopted by governments, employers and workers from around the
world.448
The principles set out in the MNE Declaration are addressed to multinational
corporations, governments employers' and worker's organisations of both home and host
countries,449 and cover areas such as employment, training, conditions of work and life,
and industrial relations as well as general policies.450
In its most recent revision of March 2017, the MNE aligned with the UNGPs, and provides
guidance on due diligence processes in achieving decent work, sustainable businesses,
more inclusive growth, and better sharing of the benefits of foreign direct investment
(“FDI”), particularly relevant for the achievement of Sustainable Development Goal 8.451
General Policies 10 provides in particular that:
Enterprises, including multinational enterprises, should carry out due diligence to
identify, prevent, mitigate and account for how they address their actual and
potential adverse impacts that relate to internationally recognized human rights,
understood, at a minimum, as those expressed in the International Bill of Human
Rights and the principles concerning fundamental rights set out in the ILO
Declaration on Fundamental Principles and Rights at Work.
It also emphasises the importance of meaningful consultation with potentially affected
groups and other relevant stakeholders including workers' organisations in the
444 UN Paris Agreement on Climate Change (2015), available at: https://unfccc.int/process-and-meetings/the-paris-
agreement/d2hhdC1pcy; referenced ibid at 2. 445 Ibid at 5. 446 Ibid at para 5.4. 447 ILO MNE Declaration above n 416. 448 ILO, ”What is the ILO MNE Declaration”, available at: https://www.ilo.org/empent/areas/mne-
declaration/WCMS_570332/lang--en/index.htm. 449 ILO MNE Declaration above n 416, General Policies No 10. 450 Ibid. 451 ILO, ”ILO revises its landmark Declaration on multinational enterprises” (17 March 2017), available at :
https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_547615/lang--en/index.htm.
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identification and assessment of actual or potential adverse human rights impacts
resulting from companies' own activities or from their business relationships.452
3.2.4 Other international standards
Due diligence expectations for adverse human rights and environmental impacts
resulting from business activities have started to emerge ever since the Protect, Respect
and Remedy Framework for Business and Human Rights (on which the UNGPs were
built) was published in 2008. For example, the ISO 26000 standard on corporate social
responsibility was launched in 2010, following negotiations between many different
stakeholders globally, including governments, NGOs, industry, consumer groups and
labour organisations, over a five year period.453 ISO 26000 “provides guidance on how
businesses and organizations can operate in a socially responsible way”, notably in the
fields of human rights, labour practices, and the environment.454 Under ISO 26000,
organisations are expected to exercise due diligence to avoid contributing to negative
impacts through their activities or the activities that are “significantly linked to those of the organization”.455
The definition of due diligence of ISO 26000 is quite similar to the one of the UNGPs or
the OCED Guidelines:456
[C]omprehensive, proactive process to identify the actual and potential negative
social, environmental and economic impacts of an organization’s decisions and
activities over the entire life cycle of a project or organizational activity, with the
aim of avoiding and mitigating negative impacts.
Since the UNGPs, other international frameworks have incorporated expectations on due
diligence for human rights and environmental impacts, including on climate change. For
example, due diligence expectations have been introduced into the International Finance
Corporation (IFC) Performance Standards457 and the Equator Principles (for financial
institutions),458 and various industry standards such as the Voluntary Principles on
Security and Human Rights in the extractives sector.459
3.2.5 EU-level standards and developments
The EU has instituted a number of initiatives imposing certain due diligence obligations
for human rights and environmental impacts, including climate impacts, such as:
452 ILO MNE Declaration above n 416, General Policies No 10e). 453 International Organization for Standardization (“ISO“), “ISO 26 000 Social Responsibility“, available at:
https://www.iso.org/iso-26000-social-responsibility.html. 454 Ibid. 455 Ibid, “Guidance on social responsibility“. 456 ISO, “ISO 26000 and OECD Guidelines: Practical overview of the linkages” (7 February 2017), available at:
https://www.iso.org/files/live/sites/isoorg/files/store/en/PUB100418.pdf. 457 The International Finance Corporation (“IFC”) Environmental and Social Performance Standards (2012) “define IFC clients'
responsibilities for managing their environmental and social risks”, and were revised in 2012 to include references to the
UNGPs. Available at: https://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-
At-IFC/Policies-Standards/Performance-Standards. The 2012 Guidance Notes state that at Guiding Note 1 para 3: “Business
should respect human rights, which means to avoid infringing on the human rights of others and address adverse human rights
impacts business may cause or contribute to. Each of the Performance Standards has elements related to human rights
dimensions that a project may face in the course of its operations. Due diligence against these Performance Standards will enable the client to address many relevant human rights issues in its project.” Available at:
https://www.ifc.org/wps/wcm/connect/9fc3aaef-14c3-4489-acf1-a1c43d7f86ec/GN_English_2012_Full-
Document_updated_June-27-2019.pdf?MOD=AJPERES&CVID=mRQmrEJ. 458 The Equator Principles is a ”risk management framework, adopted by financial institutions, for determining, assessing and
managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence
and monitoring to support responsible risk decision-making”, available at: https://equator-principles.com/about/. 459 Voluntary Principles on Security and Human Rights, available at: https://www.voluntaryprinciples.org/.
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The EU Non-Financial Reporting Directive,460 requires large companies (see
below) to publish information on non-financial issues, including the principal risks
of adverse human rights and environmental impacts that are linked to the
companies' own operations, products and services and business relationships, as
well as the policies they pursue around those risks, including the due diligence
processes implemented. The Directive applies to public-interest companies of
over 500 employees, which covers approximately 6,000 companies across the EU
including listed companies, banks, insurance companies and other companies
designated by national authorities as public-interest entities.461
The Directive creates a reporting requirement but does not actually require
companies to undertake due diligence. In addition, it includes a “comply or
explain” mechanism whereby companies may choose not to report by explaining
why they are not reporting.
Member States are required to establish enforcement means to guarantee
disclosure, but the Directive gives companies significant flexibility to disclose
relevant information. In practice, in the implementation of the EU Non-Financial
Reporting Directive by companies in Member States, there seems to be a
tendency to focus on the materiality to shareholders rather than risks to those
affected.462
On 26 June 2017, the European Commission published its Non-Binding
Guidelines,”to help companies disclose relevant non-financial information in a
more consistent and more comparable manner”.463
Also accompanying the EU non-financial reporting Directive is the recently
published Non-Binding Guidelines on corporate climate-related information
reporting, which indicate that "climate-related information can be considered to
fall into the category of environmental matters".464
The Guidelines state:
[C]ompanies and financial institutions need to better understand and
address the risks of a negative impact on the climate resulting from their
business activities, as well as the risks that climate change poses to their
business.
The Guidelines further state that:
Under the Non-Financial Reporting Directive, climate-related information
should, to the extent necessary, include both the principal risks to the
development, performance and position of the company resulting from
climate change, and the principal risks of a negative impact on the climate
resulting from the company’s activities. The proposed disclosures in these
guidelines reflect both these risk perspectives.465
460 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 (“EU Non-Financial Reporting
Directive”). 461 European Commission, “Non-financial reporting: EU rules require large companies to publish regular reports on the social
and environmental impacts of their activities“, available at : https://ec.europa.eu/info/business-economy-euro/company-
reporting-and-auditing/company-reporting/non-financial-reporting_en#companies-that-must-comply. 462 See for instance Claire Jeffrey, “Comparing the Implementation of the EU Non-Financial Reporting Directive in the UK,
Germany, France and Italy“, Frank Bold, November 2017, available at: http://www.purposeofcorporation.org/comparing-the-
eu-non-financial-reporting-directive.pdf at 4. 463 EU Non-Binding Guidelines on non-financial reporting (methodology for reporting non-financial information), 2017/C 215/01
of June 2017. 464 EU Guidelines on non-financial reporting: Supplement on reporting climate-related information, C/2019/4490 of June 2019.
See also European Commission, ”Sustainable finance: Commission publishes guidelines to improve how firms report climate-
related information and welcomes three new important reports on climate finance by leading experts” (18 June 2019),
available at: http://europa.eu/rapid/press-release_IP-19-3034_en.htm. 465 Ibid at para 2.3.
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Unless otherwise stated in the text, references to risks should be
understood to refer both to risks of negative impacts on the company
(transition risks and physical risks – see below) and to risks of negative
impacts on the climate.
Both of these kinds of risk – risks of negative impacts on the company and
risks of negative impacts on the climate – may arise from the companies
own operations and may occur throughout the value chain, both upstream
in the supply-chain and downstream. [Our emphasis]
The Guidelines also specify that:
When reporting on their climate-related risks, dependencies and
opportunities, companies should, where relevant and proportionate,
consider their whole value chain, both upstream and downstream. For
companies involved in manufacturing activities this means following a
product life cycle approach that takes account of climate issues in the
supply chain and the sourcing of raw material, as well as during the use of
the product and when the product reaches end-of-life. Companies
providing services, including financial services, will also need to consider
the climate impacts of the activities that they support or facilitate.466
The EU Timber Regulation (“EUTR”),467 entered into force in March 2013 and is
part of a broad set of measures introduced by the Forest Law Enforcement,
Governance and Trade (“FLEGT”) Action Plan adopted in 2003 to tackle illegal
logging in the world's forests.468 The EUTR requires operators who place timber
and timber products on the EU market to develop or use a due diligence system
to assess the risk that timber has been logged or traded illegally, which involves
gathering information on timber they want to import, evaluating the probability
that it is legal, and taking steps to mitigate the risk of importing illegal timber. A
failure to carry out proper due diligence is an offence, even if the wood itself is
not shown to be illegal. A recent report on the implementation of the EUTR noted
that it is “the first legal instrument at European Union level which includes
mandatory due diligence, a key principle for corporate sustainable responsibility
in line with the United Nations Guiding Principles on Business and Human Rights
(UNGPs)”.469
The EU Conflict Minerals Regulation,470
which will come into force on 1 January
2021, requires EU importers of tin, tantalum, tungsten and gold to follow a five-
step framework to: 1) establish strong company management systems; 2)
identify and assess risk in the supply chain; 3) design and implement a strategy
to respond to identified risks; 4) carry out an independent third-party audit of
supply chain due diligence; and 5) report annually on supply chain due diligence.
The EU Regulation on disclosures relating to sustainable investments and
sustainability risks: The Council and Parliament have reached political agreement
on a new regulation on sustainability-related disclosures in the financial services
466 Ibid. 467 EU Regulation No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market, , COM(2018) 669 (“EU Timber Regulation”). 468 EU Forest Law Enforcement, Governance and Trade (FLEGT) Facility, “What is the EU FLEGT Action Plan?“, available at:
http://www.euflegt.efi.int/flegt-action-plan. 469 EU Timber Regulation above n 467 at para 2. 470 The EU Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain
due diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in
conflict-affected and high-risk areas, COM/2014/0111 final - 2014/0059 (COD), (“EU Conflict Minerals Regulation”).
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sector, which forms part of the EU’s Action Plan on Financing Sustainable
Growth.471 The regulation introduces disclosure obligations for financial market
participants and financial advisers on their approaches to the integration of
sustainability risks and the consideration of adverse sustainability impacts,
including due diligence policies pursued where they consider principal adverse
impacts of investment decisions on sustainability factors.472
The General Data Protection Regulation (“GDPR”):473 requires the exercise of due
diligence with regard to one specific human rights impact: the right to
privacy. The GDPR applies to the processing of personal data by EU-based
companies, regardless of whether the processing takes place in the EU, as well as
to the processing of personal data of data subjects who are in the EU by a non-EU
company, where the processing activities are related to goods or services offered
in the EU; or the monitoring of their behaviour as far as their behaviour takes
place within the EU. In addition to the above, including the EU Timber Regulation and the EU non-binding
guidance on disclosure of climate-related information, in the area of environmental law,
the EU has also introduced various regulatory requirements which do not expressly
require “due diligence”, but are nevertheless relevant for current purposes:
The EU Environmental Liability Directive474 requires relevant companies to take
(a) all practicable steps to immediately control, contain, remove or otherwise
manage the relevant contaminants and/or other damage factors in order to limit
or to prevent further environmental damage and adverse effects on human
health, and (b) the necessary remedial measures. It does not necessarily require
fault or negligence to establish liability, but does provide for companies which can
demonstrate an absence of fault or negligence to escape the costs of remedial
actions in specific circumstances.
The Seveso III Directive475 requires industrial establishments where dangerous
substances are used or stored in large quantities to put in place safety measures
to prevent major accidents in industrial installations. Relevant companies are
required to take all necessary measures to prevent major accidents and to limit
their consequences for human health and the environment, which includes
notification of all concerned establishments,476 deploying a major accident
prevention policy,477 producing a safety report for upper-tier establishments,478
471 Proposal for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments
and sustainability risks and amending Directive (EU) 2016)2341. 472 Ibid at article 3gamma entitled “Transparency of adverse sustainability impacts at entity level”, provides in particular that:
1. Financial market participants shall publish and maintain on their websites either of the following: a) where they consider
principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to these principal adverse impacts, taking due account of their size, nature and scale of their activities and the types of their
financial products; b) where they do not consider adverse impacts of investment decisions on sustainability factors, clear
reasons for not doing so, and, where relevant, including information as to whether and when they intend to consider such
adverse impacts. 2. Information provided in accordance with point (a) of the paragraph 1 shall include at least the following:
a) information on policies on the identification and prioritisation of principal adverse sustainability impacts and indicators;
b) a description of the principal adverse sustainability impacts and of the actions taken and, where relevant, planned; c) brief
summaries of engagement policies in accordance with Article 3g of Directive 2007/36/EC, where applicable; d) reference to
the adherence to responsible business conduct codes and internationally recognised standards for due diligence and reporting
and, where relevant, the degree of alignment with the long-term global warming targets of the Paris Climate Agreement. 473 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive
95/46/EC, OJ L 119, 4.5.2016 (“EU GDPR”), at 1-88. 474 EU Directive 2004/35/EC. 475 EU Directive 2012/18/EU. 476 Ibid at article 7. 477 Ibid at article 8. 478 Ibid at article 10.
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producing internal emergency plans for upper tier establishments,479 and
providing information in case of accidents.480
The Directive of the protection of the environment through criminal law481 applies
to Member States and does not establish due diligence requirements, but is
relevant mostly insofar as it requires criminal oversight by public bodies at
Member State level. Moreover, it was introduced on the basis that:482
The available information shows that there are large differences between the
criminal sanctions provided for environmental offences in the Member States.
The existing criminal sanctions are not sufficiently stringent to ensure a high
level of environmental protection throughout the Community.
Although not legally binding, the European Commission’s Organisation
Environmental Footprint (OEF) is a multi-criteria measure of the environmental
performance of a goods or services providing organisation from a life cycle
perspective.483 It requires relevant companies to monitor and communicate their
performance based on a comprehensive assessment of environmental impacts
over the life cycle. It is particularly relevant to this study insofar as it focuses on
the life cycle of value chain of goods and services, and includes the ongoing
monitoring and communication aspects of the concept of due diligence.
Similarly, the EU Eco-Management and Audit Scheme is a voluntary
“management instrument” for companies to “evaluate, report, and improve their
environmental performance”.484 It applies worldwide and across sectors. It
requires companies to perform an environmental review constituted of five main
parts, the first of which, reminiscent of the impact assessment described in the
UNGPs and OECD Guidelines, is determination of the organisational context. It
should cover such issues as climate, air quality, water quality, natural resources
availability and biodiversity, as well as cultural, social and political circumstances.
The review also includes determination of the “needs and expectations” of
interested parties such as employees, shareholders, and suppliers, including their
needs and expectations.485
In addition to the existing measures at the EU level, calls for an EU-level legislation on
mandatory human rights and environmental due diligence across sectors and across
commodities have started to emerge, both from NGOs and trade unions486 and from
certain major multinational corporations.487 In its Shadow EU Action Plan released in
March 2019, the Responsible Business Conduct Working Group (RBC Group) of the
European Parliament called, inter alia, for the adoption of mandatory due diligence for
479 Ibid at article 12. 480 Ibid at article 16. 481 EU Directive 2008/99/EC on the protection of the environment through criminal law. 482 European Commission DG Environment, “Combating Environmental Crime”, available at: https://ec.europa.eu/environment/legal/crime/index.htm. 483 European Commission “Organisation Environment Footprint Guide”, Deliverable 3 and 4B to the Administrative Arrangement
between DG Environment and Joint Research Centre No. N 070307/2009/552517, including Amendment No 1 from December
2010, available at:
https://ec.europa.eu/environment/eussd/pdf/footprint/OEF%20Guide_final_July%202012_clean%20version.pdf. See also the
European Commission “Organization Environmental Footprint and the Development of Sector-Specific Guidance Documents”,
available at: https://ec.europa.eu/jrc/en/publication/ec-organization-environmental-footprint-and-development-sector-
specific-guidance-documents. 484 European Commission DG Environment “Eco-Management and Audit Scheme”, available at:
https://ec.europa.eu/environment/emas/index_en.htm. 485 The organisation can decide to voluntarily fulfil these needs or expectations. It is noted that these are voluntary additional
considerations, whereas in due diligence the role of stakeholders engagement is central to the concept. 486 European Coalition for Corporate Justice (”ECCJ”), ”Civil Society Calls for Human Rights and Environmental Due Diligence
Legislation”, 3 October 2019, available at: http://corporatejustice.org/news/16785-civil-society-calls-for-human-rights-and-
environmental-due-diligence-legislation. 487 Fern, ”Chocolate companies and MEPs call for EU Due Diligence Regulation”, 10 April 2019, available at:
https://www.fern.org/news-resources/chocolate-companies-and-meps-call-for-eu-due-diligence-regulation-954/.
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EU businesses and business operating within the EU.488 On 3 October 2019, over 80
NGOs and trade unions published a call on the European Commission “for effective EU
legislation that establishes a mandatory human rights and envrionmental due diligence
framework for business, companies and financial institutions operating, or offering
products or service, within the EU”.489
3.2.6 Domestic measures regulating due diligence in supply chains
Various domestic legislative measures address supply chain due diligence, but they are
often sector- or issue-specific. These are discussed in further detail in the country
reports and the analysis of the country reports below, but herewith a brief overview.
The 2017 French Duty of Vigilance law490 is the only legislative example to date
which imposes a general mandatory due diligence requirement for human rights
and environmental impacts. The law imposes a duty of vigilance on certain large
French companies (employing 5000 employees in France, or 10,000 globally).
The law extends to the activities of French companies’ subsidiaries and
subcontractors and business enterprises in the supply chain “with which the
company maintains an established commercial relationship”. In order to
discharge their legal duty, companies need to implement a “vigilance plan” which
should include reasonable measures to adequately identify risks and prevent
serious violations of human rights and the environment. As this law is new, there
are not yet any court decisions to clarify how this law will be applied, with
valuable analysis in the France Country Report in this Section being important.
However, during the course of this study various legal actions were instituted in
terms of this law.491
The Dutch Child Labour Due Diligence Law was passed in May 2019.492 It applies
to issues of child labour in supply chains for all companies (Dutch and others)
operating in the Netherlands. Companies will be required to issue a statement
declaring that they have exercised due diligence to prevent their goods and
services being made using child labour. As this law has just been passed, there is
488 Shadow EU Action Plan above n 394 at 6. 489 ECCJ above n 486. 490 French Law No. 2017-399 of March 27, 2017 on the “Duty of Care of Parent Companies and Ordering Companies”. 491 For example, the following formal notices have been sent: 1) A formal notice was sent to Total on 19 June 2019 by French
NGOs (Sherpa, Notre Affaire à Tous), Ecomaires as well as 14 local authorities requesting Total to update its vigilance plan
with respect to its climate change impacts on the basis of the French Duty of Vigilance Law.Notre Affaire A Tous, Sherpa, Les Eco Maires & ZEA “1,5°C: 13 French Local Authorities and 4 NGOs ask the French oil company Total to prevent global
warming”, 23 October 2019, available at: https://notreaffaireatous.org/wp-content/uploads/2018/10/DP-english.pdf; 2)
Another formal notice was sent to Total on 25 June 2019 by French NGO les Amis de la Terre and Ugandan NGOs for allegedly
failing to meet the requirements of the Act with respect to the company’s impacts on local communities in Uganda.
Environment News Service (ENS), “Total Sued Under France’s New Duty of Vigilance Law” (23 October 2019), available at:
http://ens-newswire.com/2019/10/23/total-sued-under-frances-new-duty-of-vigilance-law/; AFP, “NGOs file suit against Total
over Uganda oil project”, The East African (24 October 2019), available at: https://www.theeastafrican.co.ke/business/NGOs-
sue-Total-over-Uganda-oil-project/2560-5323092-r3aeku/index.html. See also BHHRC, “14 Cities and NGOs call on Total to
comply with French Duty of Vigilance Law”, available at: https://www.business-humanrights.org/en/14-cities-ngos-call-on-total-to-comply-with-french-duty-of-vigilance-law; 3) On 18 July 2019, a formal notice was sent to Teleperformance by French
NGO Sherpa and international trade union UNI Global Union to comply with its vigilance obligations in relations to workers'
rights and freedom of association in its subsidiaires. Sherpa, "Sherpa and UNI Global Union send formal notice to
Teleperformance calling on the world leader in call centers to strenghten workers' rights", 24 July 2019, available at:
https://www.asso-sherpa.org/sherpa-and-uni-global-union-send-formal-notice-to-teleperformance-calling-on-the-world-
leader-in-call-centers-to-strengthen-workers-rights-2; 4) On 26 September 2019, indigenous human rights defenders, Mexican
NGO ProDESC, and the European Centre for Constitutional and Human Rights (ECCHR) sent a formal notice to EDF calling on
the company to comply with its duty of vigilance with respect to a wind farm project in the State of Oaxaca. ProDESC,
"Indigenous human rights defenders and NGOs call on EDF Group to comply with its duty of vigilance regarding human rights
prescribed by the French 'Duty of Vigilance' Law", 15 November 2019, available at: https://prodesc.org.mx/indigenous-human-rights-defenders/; 5) On 1 October 2019, a formal notice was sent by the international trade unions International
Transport Workers' Federation (“ITF”), the European Transport Workers' Federation (“ETF”) and an alliance of unions to XPO
Logistics Europe for allegedly failing to meet the requirements of the law in relations to labour issues in its supply chain. ITF,
"Transport giant served notice under duty of vigilnce law in landmark legal move", 1 October 2019, available at:
https://www.itfglobal.org/en/news/transport-giant-served-notice-under-duty-vigilance-law-in-landmark-legal-move. 492 Netherlands Kamerstukken I, 2016/17, 34 506, A (“Dutch Child Labour Due Diligence Law”). See for the original version:
Kamerstukken II, 2015/16, 34 506, nr. 2.
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limited discussion of it, though there is valuable analysis in the Netherlands
Country Report in this Section.
Some relevant legal proposals to impose a similar general duty at domestic level:
In Switzerland there is currently a popular initiative and legislative counter-
proposals for a mandatory due diligence law.493
The Finland government has
committed to consider such a law.494
Preliminary political steps have also been
taken in Denmark, where a parliamentary motion calling for the introduction of a
bill on human rights due diligence is currently under consideration.495
In
Germany, an unofficial draft paper is circulating amongst stakeholders which
outlines a possible mandatory due diligence law,496
and the German National
Action Plan indicated that regulation will be considered if a currently ongoing
survey shows that less than 50% of companies are implementing due
diligence.497 In December 2019, it was announced that a draft outline for a
German “supply chain Act” will be published in 2020.498 In addition, the Italian
Government committed to assess legislative reform introducing human rights due
diligence.499
The UK Joint Committee on Human Rights has also proposed that a
“failure to prevent adverse human rights impacts” mechanisms be considered for
corporate human rights abuses.500
Civil society campaigns have called for mandatory due diligence laws in Austria,
Belgium, Italy, Luxembourg, the Netherlands, Norway, Sweden and the UK.501
Other legislations do not expressly impose due diligence requirements on companies but
incentivise the adoption of due diligence processes:
The Italian Legislative Decree 231/2001502 establishes corporate liability for
crimes committed in the interest or to the benefit of a legal entity, which includes
specific human rights violations such as slavery, human trafficking, forced labour,
juvenile prostitution and pornography, female genital mutilation, serious bodily
harm resulting from a breach of health and safety standards, and environmental
crimes.503 The law itself does not expressly require the exercise of due diligence
requirements for human rights and environmental impacts, but creates a defence
against corporate liability for the above offences if the company can show that it
493 Swiss Coalition for Corporate Justice (“SCCJ”), “The Initiative Text with Explanations”, available at:
https://corporatejustice.ch/wp-content/uploads//2018/06/KVI_Factsheet_5_E.pdf; SCCJ, “How does the parliamentary
counter-proposal differ from the popular initiative (RBI)?”, May 2018, available at: https://corporatejustice.ch/wp-
content/uploads/2018/07/Comparision_RBI_counter-proposal_EN-1.pdf. 494 See Ykkösketjuun official website available at: https://ykkosketjuun.fi/en/. 495 BHRRC above n 118. 496 BHRRC, “German Development Ministry drafts law on mandatory human rights due diligence for German companies”,
available at: https://www.business-humanrights.org/en/german-development-ministry-drafts-law-on-mandatory-human-
rights-due-diligence-for-german-companies. It is noted that the German Federal Government recently issued a statement
stressing that the document merely constitutes "internal considerations“ within the German Federal Ministry for Industrial
Cooperation and Development ("BMZ"), https://www.bundestag.de/presse/hib/670510-670510. 497 German Federal Foreign Office, “National Action Plan: Implementation of the UN Guiding Principles on Business and Human
Rights 2016-2020” (September 2017), 10, available at: https://www.auswaertiges-amt.de/blob/610714/fb740510e8c2fa83dc507afad0b2d7ad/nap-wirtschaft-menschenrechte-engl-data.pdf. 498 Manfred Shäfers “Regiering droht mit einem Lieferkettengesetz”, Frankfurter Allgemeine, 11 December 2019; Caspar
Dohmen, “Minister arbeiten an Lieferkettengesetz”, Süddeutsche Zeitung, 11 December 2019. 499 BHRRC above n 118. 500 UK Joint Committee on Human Rights, Human Rights and Business 2017: Promoting Responsibility and Ensuring
Accountability, April 2017 available at: https://publications.parliament.uk/pa/jt201617/jtselect/jtrights/443/443.pdf. 501 BHRRC above n 118. 502 Decreto Legislativo 8 giugno 2001, n. 231, Disciplina della responsabilità amministrativa delle persone giuridiche, della
società e delle associazioni anche prive di personalità giuridica, a norma dell'articolo 11 della legge 29 settembre 2000, n. 300,
pubblicato nella Gazzetta Ufficiale n. 140 del 19 giugno 2001. See Regulatory Review and Italy Country Report. 503 FIDH, HRIC and ECCJ, "Italian Legislative Decree No. 231/2001: A model for Mandatory Human Rights Due Diligence
Legislations?", November 2019, available at: https://e6e968f2-1ede-4808-acd7-
cc626067cbc4.filesusr.com/ugd/6c779a_d800c52c15444d74a4ee398a3472f64c.pdf at 10.
172
adopted “models of organisation, management and control” in order to identify,
prevent and mitigate the risk of commission of the relevant crime.
Some legislative measures require reporting requirements with respect to certain human
rights only, such as modern slavery and forced labour:
The 2010 California Transparency in Supply Chains Act (the “California Act”),504
requires certain companies to report on their specific actions to eradicate slavery
and human trafficking in their supply chains. However, a 2015 Report found that
the “average disclosure compliance score” under the Act was 60%, and the
average “affirmative conduct score” relating to “the extent of corporate-driven
action” was 31%.505
The UK Modern Slavery Act 2015 requires companies with a certain turnover506
carrying out “business or part of a business” in the UK507 to report annually on
the steps the company has taken, if any, to ensure that slavery and human
trafficking has not taken place in its supply chains or in its own business (or to
report if no steps have been taken).508 However, it does not mandate what should
be reported in the statement,509 and falls short of prescribing a positive obligation
to undertake due diligence. It also only relates to steps taken in relation to
slavery, forced labour and human trafficking, thereby not including due diligence
for other human rights or environmental impacts.510 Both the UK and the
California Act allows companies to state that they have taken no steps to address
modern slavery in their supply chains.511
In 2018 Australia introduced a Modern Slavery Act, largely modelled on the UK
Act, with broader application (such as including government obligations to
report).512 Similar legislation regulating modern slavery in supply chains have
been proposed in New Zealand513
and Hong Kong, 514
and in New South Wales in
Australia.515
Anti-corruption laws often require due diligence through the supply chain, and failure to
exercise this could be a criminal offence, also exposing individual directors to criminal
liability. For example, the US Foreign Corrupt Practices Act,516
and the UK Bribery Act
2010 will often be the frame of reference for companies when speaking about
compliance with “due diligence” requirements.
504 California Transparency in Supply Chains Act of 2010. 505 Development International “Corporate Compliance with the California Transparency in Supply Chains Act of 2010” (2
November 2015), available at: http://media.wix.com/ugd/f0f801_0276d7c94ebe453f8648b91dd35898ba.pdf at 2. 506 The UK Modern Slavery Act 2015 applies to companies with a global annual turnover of £36m or more. 507 Section 54(12) of UK Modern Slavery Act ibid. 508 Section 54 of the UK Modern Slavery Act ibid. 509 However, the UK Government Guidance suggests six areas of reporting. UK Government, “Slavery and human trafficking in
supply chains: guidance for businesses”, available at: https://www.gov.uk/government/publications/transparency-in-supply-
chains-a-practical-guide. See also “Independent Review of the UK Modern Slavery Act 2015, Final Report”, 22 May 2019,
available at: https://www.gov.uk/government/publications/independent-review-of-the-modern-slavery-act-final-report at 15. 510 Chiara Macchi and Claire Bright, “Hardening Soft Law: The Implementation of Human Rights Due Diligence Requirements in
Domestic Legislation”, in M. Buscemi, N. Lazzerini and L. Magi, Legal Sources in Business and Human Rights - Evolving
Dynamics in International and European Law (forthcoming, Brill, 2019). 511 NYU Stern Center for Business and Human Rights, “Research Brief: Assessing Legislation on Human Rights in Supply
Chains: Varied Designs but Limited Compliance“ (19 June 2019), available at: https://issuu.com/nyusterncenterforbusinessandhumanri/docs/nyu_jaco_research_brief_june14_fina at 5. 512 Australian Modern Slavery Act 2018. 513 The New Zealand Transparency in Supply Chains Bill, 2017, available at: https://www.parliament.nz/en/pb/bills-and-
laws/proposed-members-bills/document/52HOH_MEMBILL048_1/transparency-in-supply-chains-bill. 514
Norton Rose Fulbright “Modern Slavery And Human Trafficking – A Comparative Analysis Of Existing And Emerging
Legislation In The United Kingdom, Australia, Hong Kong And Singapore”, March 2018, available At:
http://www.nortonrosefulbright.com/knowledge/publications/165269/modern-slavery-and-human-trafficking-a-comparative-
analysis-of-existing-and-emerging-legislation-in-the-unit. 515 New South Wales Modern Slavery Act 2018 No 30. 516 US Foreign Corrupt Practices Act 15 USCs78dd-1 (1977).
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Other legislative measures which require supply chain due diligence focus on other
human rights issues, frequently labour-related, such as the US Trade Facilitation Act
which allows US Customs to seize imported goods if an importer is unable to provide a
certificate proving which measures were taken ensure that the goods were not produced
using forced labour,517
or the Netherlands Child Labour Due Diligence Act which requires
companies to conduct due diligence in order to address the risk of child labour in their
own operations and in their supply chains (discussed above).518
Some examples also exist for supply chain due diligence requirements limited to specific
sectors, such as:
the timber sector,519
industries which extract and use potential conflict minerals,520
and food safety.521
A number of countries also have due diligence requirements relating to product safety.
For instance, it is noted in the Finnish Country Report that in Finland:522
Companies are required to ensure that the products they sell are safe for
consumers and users. This includes an obligation to conduct duty of care on
whether the products can cause danger to health or property of the consumer
and in an extent that is reasonable in relation to the circumstances and
professional ability. Due diligence in the broad sense includes that the operator
must provide adequate information to consumers in their marketing so that
consumers can evaluate the associated hazards of consumer goods and consumer
services. The Supervisory Authority, Finnish Safety and Chemicals Agency, can
require operators to give consumers information in a suitable way on the
prevention or prevention of the risks associated with the use or operating
instructions necessary.
Following the implementation of EU Directives on public procurement, a number of EU
Member States have also included human rights and environmental due diligence
requirements in their national laws relating to public procurement.
For instance, the Denmark Country Report explains that the Local Government
Purchasing Service (SKI)'s framework agreements:523
[I]nclude requirements to the suppliers to exhibit due diligence in relation
to child labour, forced labour freedom of association, gender
discrimination, migrant labour and other areas across different sectors and
categories. In respect to this requirement suppliers are obligated to
investigate human rights risks in connection to their business activities in
relation to themselves and other companies they might influence, such as
major subcontractors. Simultaneously suppliers are obligated to take
measures to prevent the risks. The purpose of the provisions is for
517 BHRRC, "Modern Slavery in Company Operations and Supply Chains: Mandatory transparency, mandatory due diligence and
public procurement due diligence" (September 2017) at 18. 518 Dutch Child Labour Due Diligence Law above n 483. 519 For example, the US Lacey Act of 190, 16 USC s3372(a)(2(A) (2006); and the Australia Illegal Logging and Prohibition Act
2012 (Cth). 520 For example, section 1502 of the US Dodd-Frank Act. See also Galit A Safarty “Shining A Light on Global Supply Chains” 56
Harvard International Law Journal 419 at 423. 521 For example, article 18 of the EU General Food Law Regulation (EC) No. 178/2002; and UK Guidance notes, Food safety,
traceability, product withdraw and recall: General Food Law Regulation guidance for food businesses - Guidance Notes on
Articles 14, 16, 18 and 19 of the General Food Law Regulation (EC) No. 178/2002; and EU Guidance on the Implementation of
Articles 11, 12, 16, 17, 18, 19 And 20 Of Regulation (Ec) 178/2002 on General Food Law (20 December 2004), available at:
https://www.food.gov.uk/sites/default/files/multimedia/pdfs/1782002euguidance.pdf. 522 See Finland Country Report. 523 See Denmark Country Report.
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instance to ensure decent work and environmental conditions in relation to
the production of the products, which are purchased by the public
institutions. The agreements include requirements to the suppliers to
demonstrate social responsibility by adhering to a set of requirements that
are based on internationally recognized principles and international
initiatives, such as UN Global Compact, UN Guiding Principles on Business
and Human Rights, and OECD Guidelines for Multinational Enterprises.
The Ireland country reports quotes the Baseline Assessment according to
which:524
[H]uman rights due diligence ought to be considered as a minimum
requirement for State companies, businesses that obtain government
contracts through the public procurement process, businesses that
Ireland engages with through its embassies and State agencies and
bodies that derive State support and that act outside the jurisdiction.
Human rights due diligence should include reporting on human rights
practices outside the jurisdiction so that companies that provide
human rights reporting in Ireland, whether due to being domiciled in
Ireland, or otherwise, must also report on the human rights of their
out of territory operations.
Some countries have due diligence requirements relating to director's duties.
For instance, the UK country report notes that:525
Whilst directors are obliged under section 172 of the Companies Act to
have regard to employees, the community and the environment in
carrying out their functions, this is ultimately within the context of a
broader fiduciary duty to promote the success of the company for the
benefit of the members as a whole. In other words, the company’s (and
shareholders’) interests have primacy.
The Netherlands country report explains that under certain circumstances,
directors of Dutch companies have a duty to exercise due care with respect to the
interests of “external” stakeholders which "means that they may need to refrain
from doing things that would unnecessarily or unduly harm those interests”.526
Some examples of non-regulatory standards due diligence standards include:
The Canadian Ombudsperson for Responsible Enterprise (“CORE”) has a mandate
to investigate allegations of human rights abuses linked to Canadian corporate
activity abroad.527
Where governments use their purchasing power528 to effect change in the private
sector by integrating human rights and labour standards into the public
procurement process. For example, the EU rules on public procurement and
concession contracts directly address the use of subcontractors by suppliers.529
Public procurement requirements may also be limited to specific sectors, such as
524 See Ireland Country Report. 525 Se UK Country Report. 526 See Netherlands Country Report. 527 Global Affairs Canada, “Responsible business conduct abroad - Questions and answers”, available at:
https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/faq.aspx?lang=eng. 528 For example, see UK Joint Committee on Human Rights above n 500 at 30. 529 For example, EU Directive 2014/24/EU on public procurement and repealing Directive 2004/18/EC; and see Olga Martin-
Ortega, Opi Outhwaite and Willam Rook “Buying Power and Human Rights in the Supply Chain: legal options for socially
responsible public procurement of electronic goods” 19(3) The International Journal of Human Rights 341 at 352-3 and 347.
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the private security sector,530 or to certain human rights issues, such as human
trafficking531 or working conditions.532 A 2016 survey of the public procurement
practices in 20 jurisdictions suggests that the power of public procurement has
been largely under-utilised for the purposes of due diligence for human rights and
environmental impacts by most states to date.533
3.2.7 Case law
As there is currently no general duty on companies to undertake due diligence for their
human rights and environmental harms in most EU jurisdictions,534 case law has
developed various possible avenues to bring such claims for both corporate human rights
and environmental harms.535
Many of the cases to date are brought in terms of tort law.536 The Office of the High
Commissioner for Human Rights (OHCHR) noted that: “the concept of negligence is a
basis for corporate liability in many jurisdictions” and that “the extent to which a
company conducts human rights due diligence can be relevant when determining
whether it negligently caused or contributed to harm.”537 Civil law cases are often
brought against a parent company for harms which took place through the activities of
its subsidiary, and raise questions of parent company liability and duty of care.538 For
instance, courts in Canada,539 the Netherlands,540 the UK541 and Sweden542 have been
willing to assume jurisdiction over cases where human rights and/or environmental
harms have occurred outside the home state by subsidiaries of the defendant parent
company. In other jurisdictions such as France, legal proceedings have also raised the
question of the parent company liability for the harm caused to the employees of its
subsidiaries, although the discussions have taken place through the concept of co-
employer.543 Some of these tort cases are yet to be decided before a trial court.
530 The International Code of Conduct for Private Security Providers’ Association (“ICoCA”) is a multi-stakeholder initiative
which sets out a code of conduct for private security companies. Member States commit to require their private security
providers to abide by the Code. 531 For example, the US Federal Acquisition Regulation Subpart 22.17 and Part 52 (2012). See also Hogan Lovells,
“Contractors and Companies in the federal supply chain have an opportunity to prepare for the impending, significant explosion
of the government’s anti-human trafficking rules” (6 March 2014), available at:
https://www.lexology.com/library/detail.aspx?g=ccb6302b-03ff-4744-9a0e-fbb1c65dff39. 532 International Learning Lab on Public Procurement and Human Rights, “Public Procurement and Human Rights: A Survey of Twenty Jurisdictions” (July 2016), available at: https://www.hrprocurementlab.org/wp-content/uploads/2016/06/Public-
Procurement-and-Human-Rights-A-Survey-of-Twenty-Jurisdictions-Final.pdf at 42. 533 Ibid. 534 Although this exists in other jurisdictions, such as South Africa, where the Bill of Rights applies to private actors. See
Constitution of the Republic of South Africa Act 108 of 1996. 535 It is noted that examples of reported cases that simply deal with corporate environmental law compliance without reference
to any due diligence or related requirements or failures fall outside of the scope of this study. 536 For an overview of the cases of corporate human rights abuses committed in third countries filed before EU Member States
see Axel Marx, Claire Bright and Jan Wouters, “Access to Legal Remedies for Victims of Coporate Human Rights Abuses in Third Countries“, 2019, available at:
http://www.europarl.europa.eu/RegData/etudes/STUD/2019/603475/EXPO_STU(2019)603475_EN.pdf. 537 OHCHR, “Improving accountability and access to remedy for victims of business-related human rights abuse: the relevance
of human rights due diligence to determinations of corporate liability”, UN Doc. A/HRC/38/20/Add.2 (1 June 2018) at 19. 538 See for instance Dalia Palombo, “The Duty of Care of the Parent Company: A Comparison between French Law, UK
Precedents and the Swiss Proposals”, Business and Human Rights Journal, 2019, 1; Claire Bright, “The Civil Liability of the
Parent Company for the Acts or Omissions of Its Subsidiary: The Example of the Shell Cases in the UK and in the Netherlands”,
in Angelica Bonfanti (ed.) Business and Human Rights in Europe: International Law Challenges (Routledge, 2018) 212. 539 Choc v Hudbay Minerals Inc [2013] ONSC 1414); Garcia v Tahoe Resources (2017 BCCA 39); Hill v Hamilton- Wentworth
Regional Police Services Board 2007 SCC 41 at [20]. 540 Akpan v Royal Dutch Shell PLC Arrondissementsrechtbank Den Haag, 30 January 2013 Case No C/09/337050/HA ZA 09-
1580. 541 For example, Vedanta Resources PLC and another v Lungowe and others, [2019] UKSC 20. See also the UK Country Report. 542 Rasmus Kløcker Larsen, “Foreign Direct Liability Claims in Sweden: Learning from Arica Victims KB v. Boliden Mineral AB?”
83 Nordic Journal of International Law, 2014, 404. 543 Nicolas Bueno, “Multinational enterprises and labour rights: concepts and implementation“, in Janice R Bellace and
Beryl ter Haar, Research Handbook on Labour, Business and Human Rights Law, 421 at 429.
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A number of criminal law proceedings have been filed in various Member States such as
France,544 Germany,545 and the Netherlands546 against a parent company or its managers
for being complicit in human rights abuses,547 one of which resulting in the conviction of
the CEO of Oriental Timber Company by the Dutch Supreme Court on 18 December 2018
for aiding and abetting war crimes.548
Both civil and criminal law proceedings have given rise to a number of concerns around
the issue of effective access to justice and remedies for victims of corporate human
rights and environmental harms.549 A recent academic study mapped out the legal
proceedings brought in Europe against EU-based companies on the basis of human
rights and environmental abuses in third countries over the last decade. Of the 38 cases
analysed, 14 were dismissed, 19 are still ongoing, 4 were fully settled out of court and
only 1 led to a successful judicial outcome for the claimants on the merits of the case.550
Other claims have been based on specific statutory obligations, such as laws about
human trafficking,551 and consumer protection laws. For instance, legal proceedings on
the basis of deceptive commercial practices were instituted in Germany552 and in
France553 on the basis of the alleged discrepancies between companies' public
statements or advertising campaigns and the reality of the working conditions in their
supply chains.554
Certain claims have been brought in terms of directors' duties. For instance, the Finland
country reports a decision of the Supreme Court of Finland in which it was held that “the
negligence of two members of a three member Board of Directors was gross considering
that they had not familiarized themselves with the content of the environmental permit”.
The court also ruled that “they had deliberately neglected their duty to arrange and
supervise matters related to the permit”.555
Increasingly, but still in very few cases to date, claims are being instituted against
companies for failing to disclose climate-related risks.556 Other cases are challenging
companies' decisions on the basis that they allegedly pose unjustifiable financial
(climate-related) risks to their shareholders.557 For example, the Polish District Court of
Poznán held that the resolution of the Polish energy company Enea to authorise
construction of a coal power plant (a joint venture between Enea and Energa) was
544 See for instance BHRRC, “Lafarge lawsuit (re complicity in crimes against humanity in Syria”, available at:
https://www.business-humanrights.org/en/lafarge-lawsuit-re-complicity-in-crimes-against-humanity-in-syria. 545 See for instance BHRRC, “Danzer Group & SIFORCO lawsuits (re Dem. Rep. Congo)”, available at: https://www.business-humanrights.org/en/danzer-group-siforco-lawsuits-re-dem-rep-congo. 546 See for instance BHRRC, “Liberia: Dutch national faces eight year prison sentence for arms trading in Liberia”, available at:
https://www.business-humanrights.org/en/dutch-court-sentences-timber-trader-to-8-years-in-prison-for-providing-arms-to-
liberia-in-violation-of-un-embargo#c25980. 547 Marx et al above n 536. 548 Trial International “Guus Kouwenhoven“, last modified 12 July 2019, available at: https://trialinternational.org/latest-
post/guus-van-kouwenhoven; Marx et al ibid. 549 Jennifer Zerk, “Corporate liability for gross human rights abuses: Towards a fairer and more effective system of domestic
law remedies“, report prepared for the OHCHR, available at: https://www.ohchr.org/Documents/Issues/Business/DomesticLawRemedies/StudyDomesticeLawRemedies.pdf. 550 Axel Marx, Claire Bright, Nina Pineau and Jan Wouters, “Corporate Accountability Mechanisms in EU Member States for
Human Rights Abuses in Third Countries“, European Yearbook on Human Rights (forthcoming, 2019). 551 Yem Ban, Sophea Bun, Sem Kosal, Nol Nakry, Keo Ratha, Sok Sang and Phan Sophea v Doe Corporations, Phatthana
Seafood Co., Ltd., Rubicon Resources, LLC, S.S. Frozen Food Co., Ltd. and Wales and Co. Universe Ltd. No 2:16-cv-04271,
(C.D. Cal, 15 June 2016). 552 BHHRC, “Lidl lawsuit (re working conditions in Bangladesh)“, available at: https://www.business-humanrights.org/en/lidl-
lawsuit-re-working-conditions-in-bangladesh. 553 BHHRC, “Auchan lawsuit (re garment factories in Bangladesh)“, available at: https://www.business-
humanrights.org/en/auchan-lawsuit-re-garment-factories-in-bangladesh. 554 Carolijn Terwindt, Sheldon Leader, Anil Yilmaz-Vastardis and Jane Wright, “Supply Chain Liability: Pushing the Boundaries
of the Common Law?“ 8 Journal of European Tort Law (3) 261at 269. 555 See Finland Country Report. 556 See for instance the UK Country report discussion of complaints instituted by ClientEarth with the UK Financial Conduct
Authority against several prominent insurers for failure to adequately disclose climate risk. 557 ClientEarth, “World-first climate risk case launched over major coal plant in Poland“, available at:
https://www.clientearth.org/world-first-climate-risk-case-launched-over-major-coal-plant-in-poland/.
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legally invalid on that basis.558 Other early claims seek to hold individual defendant
companies accountable for their contribution to climate change and its consequences.559
For example, in the case of Lliuya vs. RWE, a Peruvian farmer sought compensation for
damages from the German company RWE. The claim was based on the allegation that
the defendant company, as a major emitter of greenhouse gases, contributed to the
melting of two glaciers into a lake in his village of Huaraz, and the resulting risk of
flooding. The claimant asked that the compensation should be based on the company’s
contributing share, proportional to its historic CO2 emissions, in the cost of protecting
the claimant’s house and the village against such risk.560 This is an area which is new
and developing.561
These cases should be considered against the background of recent trends in climate
change litigation against states,562 aimed at pushing legislators and policy makers to
adopt and implement climate change mitigation policies in accordance with the Paris
Agreement.563 For instance, the Urgenda case was based on the alleged inadequacy of
the Dutch State's climate mitigation policy.564 Upholding the judgment of the Hague
District Court, the Court of Appeal of the Hague ruled that the Dutch State was acting
unlawfully by failing to commit to a greater emission reduction which would allow to
meet the standard deemed necessary by the latest climate science (i.e. a reduction of
emissions by at least 25% by the end of 2020) to meet the 2°C target.565 The Court
grounded its ruling on the State’s legal duty to ensure the protection of the life and
family life of citizens, also in the long term, which is enshrined in the European
Convention of Human Rights.566 Another example is provided by the complaint submitted
to the United Nations Human Rights Committee by ClientEarth, acting on behalf of a
group of indigenous Australians from the Torres Strait region, against the Australian
government on the basis of the alleged inaction of the Australian government, allegedly
violating their human rights (by failing to protect their unique culture, and way of life,
their environment and homelands).567
3.2.8 Due diligence in the Draft Treaty
On 26 June 2014, the UN Human Rights Council adopted a resolution establishing an
open-ended intergovernmental working group (OEIGWG) on transnational corporations
and other business enterprises with respect to human rights whose mandate was to
“elaborate an international legally binding instrument to regulate, in international human
rights law, the activities of transnational corporations and other business enterprises”.568
558 ClientEarth, “Court win in world-first climate risk case puts future of Ostrołęka C coal plant in question” (1 August 2019), available at: https://www.clientearth.org/press/court-win-world-first-climate-case-ostroleka-c-future-in-question. 559 See for example Lliuya v RWE AG, Case No. 2 O 285/15, Essen Regional Court, 15 December 2016; BHRRC, “RWE lawsuit
(re climate change)“, available at: https://www.business-humanrights.org/en/rwe-lawsuit-re-climate-
change?utm_source=Corporate%20Legal%20Accountability%20Bulletin&utm_campaign=34f7f2275f-
EMAIL_CAMPAIGN_2016_11_15&utm_medium=email&utm_term=0_7734b4f86e-34f7f2275f-&dateorder=dateasc. See also
the NCP Final Statement in ING above n 443. 560 BHRRC ibid. 561 Chiara Macchi, “Climate Change, Business and Human Rights in the European Context: An Emerging Area of Legal Risk“,
draft paper presented at the conference Justice for Transnational Human Rights Violations At the Crossroads of Litigation, Policy and Scholarship, Bonavero Institute of Human Rights, Oxford, 19/20 June 2019, on file with the authors. 562 UN Environment Programme (“UNEP“), Columbia University and Sabin Center for Climate Change Law “The Status of
Climate Change Litigation: A Global Review“ (May 2017), available at : https://wedocs.unep.org/handle/20.500.11822/20767. 563 For instance, in Urgenda Foundation v. Kingdom of the Netherlands, a Dutch environmental group and 900 Dutch citizens
successfully sued the newly elected Dutch government for revision of the GCG emissions reduction goals. Urgenda Foundation
v The State of the Netherlands (Ministry of Infrastructure and the Environment), Judgment of 24 June 2015. 564 Urgenda ibid. 565 The Hague Court of Appeal, The State of The Netherlands v. Urgenda Foundation, 9 October 2018, at para 76. 566 Ibid at para 45. 567 See also ClientEarth, “Human rights and climate change: World-first case to protect indigenous Australians“, 12 May 2019, available at: https://www.clientearth.org/human-rights-and-climate-change-world-first-case-to-protect-indigenous-
australians/. 568 UN Human Rights Council, “Elaboration of an International Legally Binding Instrument on Transnational Corporations and
Other Business Enterprises with Respect to Human Rights“, A/HRC Res. 26/9 (26 June 2014). On the Treaty, see in
particular, John Ruggie, “Comments on the ‘Zero Draft’ Treaty on Business and Human Rights“, BHRRC, available at:
https://www.business-humanrights.org/en/comments-on-the-“zero-draft”-treaty-on-business-human-rights; Carlos Lopez,
“Towards an International Convention on Business and Human Rights (Part I)”, Opinio Juris, 23 July 2018, available at:
178
Following several sessions which took place between 2015 and 2017, the first official
draft (the “Zero Draft”) of the legally binding instrument on business and human rights
was released on 16 July 2018569 by Ecuador's Ambassador to the UN acting as Chair-
Rapporteur of the OEIGWG.570 On 16 July 2019, the OEIGWG published a Revised Draft
of the business and human rights Treaty.571
The preamble of the Revised Draft expressly refers to the UNGPs. In particular, it
provides that:572
All business enterprises, regardless of their size, sector, operational context,
ownership and structure have the responsibility to respect all human rights,
including by avoiding causing or contributing to adverse human rights impacts
through their own activities and addressing such impacts when they occur, as
well as by preventing or mitigating adverse human rights impacts that are
directly linked to their operations, products or services by their business
relationships.
Article 3 of the Revised Draft defines its scope as applying “to all business activities,
including particularly but not limited to those of a transnational character”. This
constitutes a change compared to the previous version (Zero Draft) which limited its
scope of application to “business activities of transnational character”,573 and is in line
with the position defended by the EU delegation during the negotiation.574
The concept of due diligence is contained in Article 5 of the Revised Draft Treaty under
the heading “Prevention”. It seeks to introduce mandatory due diligence through the
adoption of legislation at the domestic level, establishing a legal duty for businesses to
carry out due diligence.
The Revised Draft Treaty affirms, in Article 5.1 that:
State Parties shall regulate effectively the activities of business enterprises within
their territory or jurisdiction. For this purpose States shall ensure that their
domestic legislation requires all persons conducting business activities, including
those of a transnational character, in their territory or jurisdiction, to respect
human rights and prevent human rights violations or abuses.
Article 5.2 specifies that:
For the purpose of paragraph 1 of this Article, State Parties shall adopt measures
necessary to ensure that all persons conducting business activities, including
those of transnational character, to undertake human rights due diligence as
follows:
http://opiniojuris.org/2018/07/23/towards-an-international-convention-on-business-and-human-rights-part-i/; and Carlos
Lopez, “Towards an International Convention on Business and Human Rights (Part II) “, Opinio Juris, 23 July 2018, available
at: http://opiniojuris.org/2018/07/23/towards-an-international-convention-on-business-and-human-rights-part-ii/. 569 UN Human Rights Council open-ended intergovernmental working group on transnational corporations and other business
enterprises with respect to human rights (“OEIGWG”), “Legally Binding Instrument to Regulate, in International Human Rights
Law, the Activities of Transnational Corporations and Other Business Enterprises, Zero Draft”, 16 July 2018, available at:
https://www.ohchr.org/Documents/HRBodies/HRCouncil/WGTransCorp/Session3/DraftLBI.pdf. 570 Ibid. 571 OEIGWG, “Legally Binding Instrument to Regulate, in International Human Rights Law, the Activities of Transnational
Corporations and Other Business Enterprises”, 16 July 2019, (“Revised Draft”), available at:
https://www.ohchr.org/Documents/HRBodies/HRCouncil/WGTransCorp/OEIGWG_RevisedDraft_LBI.pdf. 572 Ibid, Preamble. 573 Zero Draft above n 569 at article 3. 574 Nadia Bernaz, “Clearer, Stronger, Better? - Unpacking the 2019 Draft Business and Human Rights Treaty”, Rights as Usual,
19 July 2019, available at: http://rightsasusual.com/?p=1339.
179
1. Identify and assess any actual or potential human rights violations or abuses
that may arise from their own business activities, or from their contractual
relationships;
2. Take appropriate actions to prevent human rights violations or abuses in the
context of its business activities, including those under their contractual
relationships;
3. Monitor the human rights impact of their business activities, including those
under their contractual relationships;
4. Communicate to stakeholders and account for the policies and measures
adopted to identify, assess, prevent and monitor any actual or potential
human rights violations or abuses that may arise from their activities, or from
those under their contractual relationships.
Whilst the wording used in the Zero Draft Treaty referred to “due diligence”, the Revised
Draft mirrors the terminology of the UNGPs by referring to “human rights due
diligence”.575
Article 4.5 of the Revised Draft provides that effective national procedures should be in
place to ensure compliance with the legal obligation for businesses to carry out due
diligence, “taking into consideration the potential impact on human rights resulting from
the size, nature, context of and risk associated with the business activities, including
those of transnational character”, and that those procedures should be available to all
natural and legal persons having a legitimate interest, in accordance with domestic law.
The revised draft also provides for a legal liability regime in case of harm caused to third
parties by its “contractual relationships” resulting from a failure to prevent such harm
through its due diligence processes when the company: 576
[S]ufficiently controls or supervises the relevant activity that caused the harm, or
should foresee or should have foreseen risks of human rights violations or abuses
in the conduct of business activities, including those of transnational character,
regardless of where the activity takes place.
This limitation on “contractual relationships” has been strongly criticised as not in
keeping with the UNGPs or the current regulation in this area.577
3.2.9 The usefulness and establishment of the concept of due
diligence
As evidenced in the Market Practice sector, the concept of due diligence introduced by
the UNGPs and expanded in the OECD Guidelines has become embedded in the
discourse and practices of stakeholders across the spectrum. Stakeholders also strongly
emphasise that the strength of these concepts should not be discarded for terminology
that is more “vague”.
These conclusions are also reflected in the literature. Andreas Rühmkorf and Lena
Walker write about the terminology used to describe due diligence standards of care
across various jurisdictions in the EU:578
Due to national differences in legal systems and particularly due to the common
575 Ibid. 576 Revised Draft above n 571 at article 6.6 577 For example, see Doug Cassel “Five ways the new draft treaty on business and human rights can be strengthened”, BHRRC,
9 September 2019, available at: https://www.business-humanrights.org/en/five-ways-the-new-draft-treaty-on-business-and-
human-rights-can-be-strengthened. 578 Rühmkorf and Walker above n 371 at 4.
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law / civil law divide, a number of different terms are used in the existing laws
aimed at improving greater corporate accountability. These terms have different
functions and meanings such as Sorgfaltspflicht in German law, duty of care in
English law, due diligence (primarily also in English law) and vigilance in French
law. They are all used in different contexts. Whilst the differences in terminology
are due to the national context of legal systems, they hamper international
discussions about how to impose greater corporate responsibility for global supply
chains onto transnational corporations as there is no uniform term that is used. It
appears as if common law lawyers and civil lawyers prefer using terminology and
concepts that they are familiar with.
They further add:579
[Due diligence] resonates with existing standards of duty of care in tort law and
comparable concepts in civil law. It may be used to clarify these standards'
application in the context of complex corporate structures and value chains.
The authors highlight that due diligence is a widely used and recognised concept at the
international level. As a result, they advise against creating a new term or using a
terminology that is specific to one system (such as duty of vigilance) as this would
create confusion.580 In addition, they explain that due diligence is more expansive than a
duty of care in terms of enforcement as it is not limited to private action (a tort claim
brought by alleged victims) but can also be subject to public enforcement (such as a fine
for failure to conduct adequate due diligence).581
3.3 Environmental due diligence and climate change
3.3.1 Environmental due diligence
The due diligence developments following the introduction by the UNGPs and relevant to
the mandate of this study, such as the French Duty of Vigilance Law and various other
current proposals for mandatory due diligence at national level, refer to human rights
and environmental harms. These developments are discussed at length elsewhere in this
study. Similarly, environmental and human rights civil society organisations are jointly
and separately advocating for mandatory due diligence at domestic and EU level. For
example, in a recently published call to the European Commission, over 80 Human
Rights and Environmental NGOs, together with trade unions called “for effective EU
legislation that establishes a mandatory human rights and environmental due diligence
framework for business, companies and financial institutions operating, or offering
products or service, within the EU”.582
However, separately from this framework, environmental laws have developed which,
although not framed in due diligence language or a legal standard of care for companies,
are nevertheless informative for the purposes of this study. In particular, the basic
environmental principles of prevention and precaution have similarities with due
diligence which may, in time, prove helpful for the interpretation of any regulatory
measure. Moreover, various existing laws are aimed at the protection of the environment
(see for example the table in Part IV Annexure C.3). An August 2019 study for the
German Federal Ministry of Environment on the concept of environmental due diligence
and how it could be applied as a legal requirement, indicates that corporate
management systems which have been established for these laws on environmental
579 Ibid at 5. 580 Ibid at 7. 581 Ibid at 16. 582 ECCJ above n 486
181
protection could “play an important role in the (partial) fulfilment of due diligence
obligations”.583 For example, it states:584
Environmental management systems previously focused primarily on direct
environmental impacts (e.g. energy and material efficiency at specific sites).
However, the most recent revision of the international environmental
management standard ISO 14001 in 2015 and the amendment of the European
Regulation for the Eco Management and Audit Scheme (EMAS) in 2017 and 2018
have strengthened aspects that are particularly relevant to the exercise of
environmental and human rights due diligence. These include the increased
consideration of indirect environmental impacts resulting from upstream and
downstream stages of the value chain as well as of the views and expectations of
relevant stakeholder groups, when determining the significant environmental
impacts of an organisation.
The study states that “[i]n order to leverage these synergies, the environmental
management system can be integrated into the company’s greater due diligence
processes”.585
Interviewees in our study confirmed that, in the past, the human rights due diligence
and environmental movements have developed in “silo[s]”, but that they are beginning
to recognise their commonalities, precisely because of the developments around
mandatory due diligence regulation.
Indeed, across Europe the campaigns around mandatory due diligence legislation in
Member States are driven by civil society consortia made up of human rights, corporate
accountability and environmental organisations.
Similarly, environmental groups were some of the most proactive participants in our
survey, in terms of reaching out to us, disseminating the survey amongst their networks,
providing detailed and coordinated answers in optional text boxes, and asking to be
further involved in the study. Many of these groups have been conducting their own
internal studies and work on due diligence for impacts on the environment and people in
agriculture, cocoa, forestry, timber, garment and other supply chains, and are actively
exploring and pushing for due diligence regulation at domestic and EU level.586
Nicolas Bueno writes as follows to explain the link between environmental issues,
including climate change impacts, and human rights:587
Environmental issues are not specifically addressed in the UNGP, which cover only
human rights. Corporations are nevertheless expected to respect and conduct due
diligence with regard to all internationally recognized human rights, including
those that necessarily entail environmental aspects, such as the rights to health,
water, or food, or the rights of indigenous peoples. Additionally, Chapter VI of the
OECD Guidelines defines the conduct that multinational enterprises should adopt
to take due account of the need to protect the environment.
583 Cara-Sophie Scherf, Peter Gailhofer, Nele Kampffmeyer, Tobias Schleicher “Responsibility towards society and the
environment: businesses and their due diligence obligations Background paper from the research project commissioned by the
Federal Environment Agency”, August 2019, German Federal Ministry for the Environment, Nature Conservation and Nuclear
Safety, available at: https://www.umweltbundesamt.de/publikationen/umweltbezogene-menschenrechtliche at 7. 584 Ibid. 585 Ibid. 586 For example, a recent report by Fern, Tropenbos International and Fairtrade, and authored by Duncan Brack, discusses
mandatory due diligence within a range of options to achieve sustainable cocoa supply chains. Duncan Brack,”Towards
sustainable cocoa supply chains: Regulatory options for the EU”, report for Fern, Tropenbos International and Fairtrade, June
2019, available at: https://www.fern.org/news-resources/towards-sustainable-cocoa-supply-chains-regulatory-options-for-the-
eu-1978/. 587 Nicolas Bueno, “The Swiss Popular Initiative on Responsible Business: From Responsibility to Liability”, in Liesbeth
Enneking et al (eds.), Accountability, International Business Operations, and the Law, London: Routledge (2020), 239.
182
Nevertheless, existing environmental laws are rarely phrased in terms of corporate due
diligence requirements as a legal standard of care. Examples of existing environmental
laws which require companies to take specific steps are discussed above. Moreover,
existing soft law standards such as the EU Eco-Management and Audit Scheme588
provide interesting examples of how due diligence requirements are applied, albeit
currently on a voluntary basis.
As noted in the Market Practices section, an international and comparative
environmental law expert, Ivano Alogna, who specializes in the legal models used for
environmental regulation, noted that although there is currently a “bricolage” of legal
instruments aimed at the protection of the environment, the French Duty of Vigilance
Law is currently the “the first legislative model worldwide that places the burden of
responsibility of prevention on the multinational company, which incurs its civil liability
for its activities and environmental externalities...”. He added that “this new legal model
may offer a solid foundation to draft a European instrument of this kind”.
There are nevertheless principles of international and national environmental laws which
are worth mentioning as they are likely to be influential in the interpretation of any due
diligence standard of care relating to the environment. Notably, the principles of
prevention and the precautionary approach have similarities with the concept of due
diligence insofar as they relate to pre-hoc decision making and risks management.
The principle of prevention is central to environmental protection laws. UNEP indicates
that this is because:589
In some instances it can be impossible to remedy environmental injury once it
has occurred: the extinction of a species of fauna or flora, erosion, and the
dumping of persistent pollutants into the sea create intractable, even irreversible
situations. Even when harm is remediable, the cost of rehabilitation is often very
high. In many instances it is impossible to prevent all risk of harm. In such
instances, it may be judged that measures should be taken to make the risk “as
small as practically possible” in order to allow necessary activities to proceed
while protecting the environment and the rights of others.
The prevention of irremediable harms is also a core concept in the UNGPs. Guiding
Principle 24 provides:
Where it is necessary to prioritize actions to address actual and potential adverse
human rights impacts, business enterprises should first seek to prevent and
mitigate those that are most severe or where delayed response would make them
irremediable.
In describing an understanding of risk management process that is reminiscent of the
due diligence concept, UNEP described the prevention principle as:
[A]n overarching aim that gives rise to a multitude of legal mechanisms, including
prior assessment of environmental harm, and licensing or authorizations that set
out the conditions for operation and the remedial consequences for violation of
the conditions. Emission limits and other product or process standards, the use of
best available techniques (BAT), and other similar techniques can all be seen as
applications of prevention.
588 Above n 485. 589 Dinah Shelton and Alexandre Charles Kiss, “Chapter 2: Basic Principles of Environmental Protection” in Judicial Handbook on
Environmental Law, United Nations Environment Programme (“UNEP”), 2005, at 20, referring to Solothurn v. Aargau,
Switzerland Bundesgericht (Federal Tribunal), 1 Nov. 2000.
183
Prevention is also linked to the notion of deterrence and the idea that
disincentives such as penalties and civil liability will cause actors to take greater
care in their behaviour to avoid the increased costs, thus preventing pollution
from occurring.
It is clear that although the concept of corporate due diligence is not utilised, the idea of
incentivising management process to prevent or minimise risks, which may otherwise be
irremediable, through penalties and civil liability which cause actors to “take greater care
in their behaviour”, is central to this study.590
The precautionary principle is similarly relevant. Principle 15 of the Rio Declaration on
Environment and Development (1992)591 describes the precautionary approach as
follows:
In order to protect the environment, the precautionary approach shall be widely
applied by States according to their capabilities. Where there are threats of
serious or irreversible damage, lack of full scientific certainty shall not be used as
a reason for postponing cost effective measures to prevent environmental
degradation.
UNEP indicates that:592
While there is no single agreed formulation or “principle” of precaution that is
used in all contexts, and precaution has not acquired generally accepted status as
a legal principle in its own right or as customary international law, there is a basic
concept of precaution that animates much of modern environmental protection
regimes - the notion that environmental regulators often have to act on the
frontiers of knowledge and in the absence of full scientific certainty. Precaution
has variously been associated with the ideas that: 1) scientific uncertainty should
not be used as a reason not to take action with respect to a particular
environmental concern; 2) action should affirmatively be taken with respect to a
particular environmental concern; 3) those engaging in a potentially damaging
activity should have the burden of establishing the absence of environmental
harm; and 4) a State may restrict imports based on a standard involving less
than full scientific certainty of environmental harm. [Original emphasis]
Again, a notable similarity with the concept of due diligence is that “those engaging in
the potentially damaging activity should have the burden of establishing the absence of
the environmental harm”. Moreover, the idea that an actor should act with precaution for
potential risks, even if it is not entirely certain that those risks will occur, aligns with the
enquiry regarding prioritisation of severe risks based on an impact assessment as
described in the UNGPs.
The German country report for this study highlights examples of how the precautionary
principle is translated into due diligence at national level through laws for the protection
of the environment. German country reporter Daniel Augenstein writes:
Many due diligence obligations in German environmental law owe their existence
to the precautionary principle which, as laid down in Article 20a of the German
590 Shelton and Kiss ibid at 21 lists further examples of cases which discuss the principle of prevention: Greenpeace Australia
Ltd. v. Redbank Power Company Pty. Ltd. and Singleton Council 86 LGERA 143 (1994 Australia); Leatch v. National Parks and
Wildlife Service and Shoalhaven City Council 81 LGERA 270 (1993, Australia); Vellore Citizens Welfare Forum v. Union of India
AIR 1996 SC 2715; Shela Zia v. WAPDA Vol. XLVI All Pakistan Legal Decisions 693. 591 Rio Declaration of Environment and Development (1992), available at: http://www.unesco.org/education/pdf/RIO_E.PDF
(last accessed 5 September 2019). 592 Shelton and Kiss above n 589.
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Constitution, requires the state to prevent risks to the environment from
materialising even where cause-and-effect relationships are not fully established
scientifically. The federal law that provides for protection of humans, animals and
the environment against harmful emissions (Bundesimmissionsschutzgesetz,
BISchG) is one such example.
The German country report further states that in terms of this law:
The duty of precaution (§ 5 I (1) No 2) requires operators to take measures, in
accordance with the scientific and technical state of the art (‘Stand der Technik’,
§ 3 VI (1) BISchG), to reduce risks of environmental nuisance whose
materialisation is possible yet not sufficiently probable to trigger a duty of
protection. The concrete scope of the latter duty is determined in the light of
criteria such as the risk-potential of the emissions, the severity of damages to be
expected, and the economic costs of minimising risks.
Again, the similarities with due diligence as described in the UNGPs is noted regarding
the assessment and prioritisation of severe risks, relevant to the context.
The German country report further highlights two important features of this law, which is
common for laws aimed at the protection of the environment:
Compliance of operators is monitored and enforced by the competent public
authority. Unlike the duty of protection, the duty of precaution is generally not
considered to confer subjective rights on third parties.
Although the precautionary principle does not itself give rise to a legal duty for
companies at international level, it has been used to interpret existing duties in case law.
For example, in the case of Asociacion Coordinadora de Usuarios, Consumidores y
Contribuyentes v Enre-Edesur,593 an Argentinian court referred to the principle of
precaution in making an order which required a company to produce a report, through
stakeholder engagement, on the potential negative impacts of an electricity grid, and
how they will be prevented or mitigated. The court temporarily suspended operations
until the report was produced.
3.3.2 Due diligence and climate change
Given the key focus on climate change due diligence within the mandate of this study, it
is worth discussing in more depth the recent developments relating to due diligence for
companies’ climate change impacts. Many of these developments took place as this
study was being undertaken.
In 2018, the Expert Group on Climate Obligations of Enterprises released the Principles
on Climate Obligations of Enterprises which “aim to provide a legal basis for active
investment management and engagement geared at stimulating enterprises to comply
with their legal obligations” to reduce their greenhouse gases emissions.594
On 25 June 2019, a report from the UN Special Rapporteur on extreme poverty and
human rights reaffirmed the impact of climate change on human rights in no uncertain
terms. The report criticises states and other actors for “giving only marginal attention to
human rights in the conversation on climate change”595 for decades, and that “as a full-
593 Asociacion Coordinadora de Usuarios, Consumidores y Contribuyentes v. ENRE-EDESUR, Federal Appellate Tribunal of La
Plata (2003). See Shelton and Kiss ibid at 21-22. 594 Expert Group on Climate Obligations of Enterprises, 5 Principles on Climate Obligations of Enterprises, Eleven International
Publishing, Den Haag (2018), available at:
https://climateprinciplesforenterprises.files.wordpress.com/2017/12/enterprisesprincipleswebpdf.pdf. 595 Report of the Special Rapporteur on extreme poverty and human rights, “Climate change and poverty“, A/HRC/41/39 (July
2019), available at: https://documents-dds-ny.un.org/doc/UNDOC/GEN/G19/218/66/PDF/G1921866.pdf?OpenElement at 1.
185
blown crisis bears down on the world, business as usual is a response that invites
disaster”.596 It emphasises the role to be played by companies, alongside other actors, in
providing and implementing solutions to climate change,597 through “a radically more
robust, detailed, and coordinated approach”.598
In addition, in a September 2019 statement, UN High Commissioner for Human Rights,
Michelle Bachelet, stated that climate change is “the greatest ever threat to human
rights”.599 It is now an established principle that “adopt[ing] legal and institutional
frameworks that protect” against harm resulting from human-made climate change is
both part of the state duty “to protect against environmental harm that interferes with
the enjoyment of human rights, including harm caused by private actors”,600 and of the
corporate responsibility to respect human rights set out in the UNGPs.601 It is now
widely accepted that “climate change poses an immediate and far-reaching threat to
people and communities around the world and has implications for the full enjoyment of
human rights”.602
Also in September 2019, during Climate Week, the UN Global Compact reported during
that 87 companies committed to climate targets across their operations and value
chains, with a view to limiting temperature rise to 1.5C above pre-industrial levels.603
In 2014, the International Bar Association Task Force on Climate Change Justice and
Human Rights published its landmark report on Achieving Justice and Human Rights in
an Era of Climate Disruption.604 The Report recommends a “multifaceted” approach to
corporate responsibility which include, inter alia:
As a first step, corporations should adopt and promote the UN Guiding Principles
on Business and Human Rights as they pertain to human rights and climate
change.
The report further explains that:
To advance corporate responsibility specifically in the context of climate change,
a model policy should commit the corporation to take a number of concrete steps.
Such measures must include due diligence of corporate projects, including the
environmental practices of the company’s affiliates, and as far as reasonably
practicable, its major contractors and suppliers as well as compliance with
reporting obligations [...]. Secondly, the corporation should implement a due-
diligence process to identify, prevent, mitigate and account for its actual climate
change impacts. While awareness is the first step, the corporation must translate
its awareness into active efforts to minimise or reverse the impacts of its actions
on climate change and human rights. The corporation should consider measures
it can implement to assist in achieving the objective of limiting global warming to
no more than a 2°C increase. The corporation’s goal should be to implement the
most advanced available technology to minimise its carbon footprint. In situations
596 Ibid at 3. 597 Ibid. 598 Ibid at 1. 599 Agence France-Presse, “Climate crisis is greatest ever threat to human rights, UN warns”, The Guardian (9 September
2019), available at: https://www.theguardian.com/law/2019/sep/09/climate-crisis-human-rights-un-michelle-bachelet-united-
nations. 600 Report of the Independent Expert on the issue of human rights obligations relating to the enjoyment of a safe, clean,
healthy and sustainable environment, John H. Knox, A/HRC/25/53 (30 December 2013) at 1. 601 Macchi above n 561 at 1. 602 UN Human Rights Council Resolution 7/23, “Human rights and climate change“ (28 March 2008), available at :
https://ap.ohchr.org/documents/E/HRC/resolutions/A_HRC_RES_7_23.pdf. 603 United Nations Global Compact, the Science Based Targets initiative (SBTi) and the We Mean Business coalition "87 major
companies lead the way towards a 1.5°C future at UN Climate Action Summit", UN Global Compact (22 September 2019),
available at: https://www.unglobalcompact.org/news/4476-09-21-2019. 604 International Bar Association Climate Change Justice and Human Rights Task Force Report, “Achieving Justice and Human
Rights in an Era of Climate Disruption“, July 2014.
186
where negative impact on the environment is unavoidable given current
technology or if the cost of such technology is prohibitive, the corporation bears
responsibility for corresponding mitigation and remediation. Thirdly, the
corporation should implement remediation processes that allow for open
communication with stakeholders most affected by the corporation’s operations.
[...]
The OECD Guidelines set out that companies are expected to carry out due diligence in
respect to their environmental impacts, including climate impacts. Moreover, the UNGPs,
read with the OECD Guidance on Responsible Business Conduct, the Paris Agreement,
and recent legislation such as the French Duty of Vigilance Law and the EU non-financial
reporting directive, all confirm the trend observed by interviewees that climate change
impacts are to be viewed as included within due diligence insofar as they relate to the
impacts of the individual company (and the steps it can take to address them) on people
and the planet.
The evidence from our surveys and interviews shows that the language of “climate
change due diligence” is currently very rarely used, indicating that self-standing due
diligence processes which focus exclusively on climate change are rare. Interviewees
also indicated that whereas their companies do consider their climate change impacts,
this is usually situated in other departments. However, overall, stakeholders across
business and other groups agreed that environmental, climate change and other
sustainability impacts are understood to be within scope of a company’s existing due
diligence requirements. Business survey respondents indicated that environmental
impacts, including air pollution, greenhouse emissions and climate change aspects, are
frequently viewed as included in their due diligence processes, either expressly or
implied.
These findings should be viewed within the context of the ongoing evolution of due
diligence requirements, and steps to implement these within corporate practice, which
are still relatively new. In particular, the OECD Guidelines expect companies to carry out
due diligence in respect to their environmental impacts, including climate impacts. The
French Duty of Vigilance Law and the EU non-financial reporting directive confirm the
trend observed by interviewees that climate change impacts are to be viewed as
included within due diligence. However, the OECD Guidance on Responsible Business
Conduct was adopted on 31 May 2018,605 and the EU Non-Financial Reporting Directive
required annual reporting from 2018 onwards.606
These laws have not yet generated any case law to clarify the application of these
obligations, in particular with respect to how climate change is included as part of due
diligence expectations. As such, they have also had a very short opportunity to inform
corporate practices. Indeed, during the course of this study, the EU published its non-
binding guidance on reporting climate-related information,607 discussed above. A few
weeks prior, as discussed below, the Netherlands OECD NCP clarified concrete ways in
which companies’ individual due diligence actions can include targets to address climate
change, even in the absence of agreed international measures and standards.608 In
determining the company’s due diligence responsibilities, reference was made to the
relevant company’s steps in terms of the Paris Agreement on Climate Change.609
605 OECD RBC Guidance above n 370. 606 EU Non-Financial Reporting Directive above n 24. 607 EU Guidelines on non-financial reporting: Supplement on reporting climate-related information, C/2019/4490 of June 2019.
See also European Commission, ”Sustainable finance: Commission publishes guidelines to improve how firms report climate-
related information and welcomes three new important reports on climate finance by leading experts”, 18 June 2019, available
at: http://europa.eu/rapid/press-release_IP-19-3034_en.htm. 608 NCP Final Statement in ING above n . 609 See Paris Agreement on Climate Change, available at: https://unfccc.int/process-and-meetings/the-paris-
agreement/d2hhdC1pcy, (last accessed 19 June 2019).
187
Similarly, as can be seen in the regulatory review of this study, regulatory developments
requiring due diligence, such as the French Duty of Vigilance Law and the proposed
Swiss law on mandatory due diligence, expressly require due diligence for human rights
and environmental impacts. Again, these requirements are either new or still in proposed
form. The few existing examples of climate change litigation are similarly very recent,
and insofar as they related to state due diligence obligations relating to climate
change,610 were not framed relating to corporate due diligence. As a result, to date,
courts are yet to clarify specific climate change due diligence obligations for individual
companies.
These developments, along with other developments in the field of climate change law
and policy at the EU level, have led authors to argue that “any coherent human rights
due diligence regulation that may emerge in the near future at the EU level should
necessarily include the climate change responsibilities of corporations”.611 It is noted that
the EU Action Plan on Sustainable Finance, in addition to calling for an assessment of
due diligence which forms the mandate of this study, also calls for an assessment of
“measurable sustainability targets”.612
The time will tell how courts will apply these mandatory due diligence requirements with
respect to human rights and environmental impacts, and in turn, how this will influence
corporate practice. The status quo is constantly developing as new regulations are
adopted and proposed at domestic level. It is likely that any regulatory mechanisms at
domestic and, potentially, EU level which follow the trend to expressly include
environmental impacts as part of mandatory due diligence may lead to a change in
corporate practices also with respect to express inclusion of climate change impacts.
An important clue as to how due diligence expectations for climate change impacts may
be applied in any future litigation is provided by the OECD NCP statement in the matter
of Oxfam Novib, Greenpeace Netherlands, BankTrack and Friends of the Earth
Netherlands (Milieudefensie) v ING.613 The complaint related to the bank’s alleged
failures to set measurable objectives and targets relating to the climate impacts of its
finance activities. In its final statement, the NCP found with regard to companies’
responsibility to measure how they meet targets:614
The NCP stresses that absence of a methodology or international accepted
standard will not dismiss companies, including financial institutions, to seek
measurement and disclosure of environmental impact “in areas where reporting
standards are still evolving such as, for example, social, environmental and risk
reporting. This is particularly the case with greenhouse gas emissions”. At the
same time, the NCP takes into consideration that financed emissions are indirect
and thus more difficult to measure and control. Meanwhile it has to be noted ING
made an effort to design a standard.
The NCP further finds with respect to the setting of targets:615
As such, the NCP observes that the OECD Guidelines demand that ING, and other
commercial banks, put effort into defining, where appropriate, concrete targets to
manage its impact towards alignment with relevant national policies and
international environmental commitments. Regarding climate change, the Paris
610 BHRRC, “Turning up the heat: Corporate legal accountability for climate change”, Corporate Legal Accountability Annual
Briefing 2018, available at: https://www.business-humanrights.org/sites/default/files/English_ES_FINAL.pdf at 1. 611 Macchi above n 561 at 3. 612 Action 10 of the Communication from the Commission to the European Parliament, the European Council, the Council, the
European Central Bank, the European Economic and Social Committee and the Committee of the Regions Action Plan:
Financing Sustainable Growth, COM/2018/097 final, 8 March 2018, available at:
https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en. 613 NCP Final Statement in ING above n 443. 614 Ibid at 5. 615 Ibid at 5.
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Agreement is currently the most relevant international agreement between
states, a landmark for climate change, signed by the State of the Netherlands.
The NCP is sensitive to the argument that financed emissions are indirect and
thus more difficult to measure and control. The NCP considers that impact
measurement of financed emissions is a new field of expertise, and recognizes
the fact that ING, and banks like ING, face considerable challenges in developing
an appropriate methodology, including the setting of intermediate targets.
As the Guidelines ask for periodically reviewing the relevance of objectives or
targets, and given the long term objectives of the climate debate, the NCP
encourages ING to set intermediate targets as well.
These findings of the NCP are particularly relevant to this study in two important
respects. Firstly, it clarifies that even where there is no agreed methodology for
measuring targets (such as in the area of climate change and other environmental
harms), this does not excuse companies from the responsibility to set measurable
targets for the purposes of environmental due diligence in accordance with the OECD
Guidelines. The NCP refers to the Paris Agreement on climate change as providing some
indication of how to link individual companies’ due diligence and their climate change
targets.
Secondly, in the company’s defence, it raised the fact that it had already, in May 2015,
committed to “a future methodology to be developed by the Science Based Target
Initiative”.616 These existing commitments and steps taken were noted and taken into
account by the NCP in its findings. This illustrates the point below regarding due
diligence as a defence, and particularly the desirability for companies of having robust
processes in place, which can be pointed towards should an issue arise.
Whereas until recently it was not clear how an individual company could be held (legally)
liable to carry out due diligence for large-scale impacts such as climate change, the
above case illustrates that due diligence obligations are now increasingly being
understood as including climate change due diligence. In threatening legal action if Total
does not correct its vigilance plan (i.e. its due diligence steps) under the French Duty of
Vigilance Law, the consortium of local city councils and civil society organisations state:
The global effort must be shared by all. Through this first public interpellation,
local communities and NGOs send a clear message to the whole economical
world: the climate burden must be tackled by all.
In September 2019, forest fires in the Amazon spurred investors to coordinate, through
the UN Principles for Responsible Investment (PRI), a statement which calls on investee
companies to take measurable action for their deforestation and resulting climate change
impacts.617 The statement declares that:
As investors, we see deforestation and the associated impacts on biodiversity and
climate change as systemic risks to our portfolios and see the reduction of
deforestation as a key solution to managing these risks and contributing to
efficient and sustainable financial markets in the longer term.
In the statement, investors call on companies to:
[R]edouble their efforts and demonstrate clear commitment to eliminating
deforestation within their operations and supply chains, including by:
616 Ibid at 2. 617 UN PRI, “Investor statement on deforestation and forest fires in the Amazon”, (September 2019), available at:
https://d8g8t13e9vf2o.cloudfront.net/Uploads/g/i/u/investorstatementondeforestationandforestfiresintheamazon_76915.pdf.
189
1. Publicly disclosing and implementing a commodity-specific no deforestation
policy with quantifiable, time-bound commitments covering the entire supply
chain and sourcing geographies.
2. Assessing operations and supply chains for deforestation risk and reduce this
risk to the lowest possible level, disclosing this information to the public.
3. Establishing a transparent monitoring and verification system for supplier
compliance with the company’s no deforestation policy.
4. Reporting annually on deforestation risk exposure and management, including
progress towards the company’s no deforestation policy.
These steps closely follow the components and language of due diligence: assessment,
monitoring, reporting, as well as the implementation of policies covering the entire
supply chain. Moreover, by referring to “quantifiable, time-bound commitments”, the
statement forms part of an increasing trend whereby companies are required to take
measurable steps towards their climate change impacts, even in the absence of
internationally agreed corporate targets, as also envisioned in the OECD Guidelines and
the NCP statement in the matter of ING.
As further confirmation of this trend, the proposed EU Regulation on disclosures relating
to sustainable investments and sustainability risks specifically requires information
relating to “adherence to responsible business conduct codes and internationally
recognised standards for due diligence and reporting and, where relevant, the degree of
alignment with the long-term global warming targets of the Paris Climate Agreement”.618
It is within this context that this study discusses a regulatory sub-option which, in addition
to a general duty, would establish particular requirements for large companies in relation to
due diligence for their climate change impacts.
3.4 Due Diligence, sustainability and the SDGs
Insofar as this study is mandated within the context of sustainable finance, it is
important to consider how due diligence fits in with sustainability more broadly.
A number of SDGs are particularly relevant to the study:
SDG 8 on Decent Work;
SDG 12 targeting Responsible production and consumption, in particular with
regard to the following SDG Targets:
o 12.4 By 2020, achieve the environmentally sound management of
chemicals and all wastes throughout their life cycle, in accordance with
agreed international frameworks, and significantly reduce their release to
air, water and soil in order to minimize their adverse impacts on human
health and the environment;
o 12.6 Encourage companies, especially large and transnational companies,
to adopt sustainable practices and to integrate sustainability information
into their reporting cycle;
o 12.a Support developing countries to strengthen their scientific and
technological capacity to move towards more sustainable patterns of
consumption and production;
618 Article 3gamma of the EU proposal above n 471.
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SDG 16 on peace, justice and strong institutions.
It has been established by the UN, which is responsible for the SDGs agenda as well as
the interrelated business and human rights framework, that undertaking appropriate
human rights and environmental due diligence contributes to sustainable development.
In its 2018 Report, the UN Working group on the issue of human rights and transnational
corporations and other business enterprises explained that:619
Business strategies to contribute to the Sustainable Development Goals are no
substitute for human rights due diligence. On the contrary, robust human rights
due diligence enables and contributes to sustainable development. For
businesses, the most powerful contribution to sustainable development is to
embed respect for human rights in their activities and across their value chains,
addressing harm done to people and focusing on the potential and actual impacts
— as opposed to starting at the other end, where there are the greatest
opportunities for positive contribution. In other words, businesses need to realize
and accept that not having negative impacts is a minimum expectation and a
positive contribution to the Goals.
3.5 Due Diligence and corruption
Country reporters were asked to discuss due diligence requirements as they relate to
corruption. As is evidenced from the country reports, corruption is commonly regulated
at Member State level in terms of criminal law, and do not ordinarily provide remedies
for victims. Moreover, the framework on which this study is based, including the
evolution of the concept of due diligence from the UNGPs to the OECD Guidelines and
the French Duty of Vigilance Law as set out in the European Parliament report, frame
due diligence in terms of human rights and environmental harms, which are currently
unregulated by corruption regulation. As such, corruption due diligence falls outside of
the focus of this study for the purposes of “human rights and environmental” due
diligence.
However, the regulation of bribery and corruption law provide interesting comparators
for this study, insofar as corruption regulation require similar group-wide, and often
transnational, risk management procedures. The UK Bribery Act, for example, provides
for a due diligence defence similar to the one under consideration in this study.620 In this
respect, it is likely that companies’ experience with due diligence practices for bribery
laws have also informed their responses to the possible impacts of the regulatory options
for this study.
Moreover, a study cited elsewhere in this report by Genevieve LeBaron and Andreas
Rühmkorf compared the practices of companies in response to the UK Bribery Act (which
includes state-based oversight and sanctions for enforcement such as considered in our
Option 4.3(b) and the UK Modern Slavery Act (a reporting requirement similar to our
Option 3). They find that the state-based enforcement model, which in the case of the
UK Bribery Act is also tied to criminal liability, drives significantly more implementation
in corporate practice than reporting requirements without sanctions.621
The Assessment of Options section furthermore relies on information available from
assessments of corruption due diligence requirements, including relating to possible fines
and impacts on the costs for public authorities of state-based enforcement mechanisms.
619 UN Working Group above n 376 at para 10. 620 Section 7 of the UK Bribery Act 2010. 621 Genevieve LeBaron and Andreas Rühmkorf, “Steering CSR Through Home State Regulation: A Comparison of the Impact of
the UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance”, Global Policy Vol 8 Supp. 3 (May 2017) 15-28
at 26.
191
3.6 Due Diligence in the agricultural sector, including coffee, tea
and cocoa subsectors
Generally speaking, stakeholders have expressed their views against regulatory
measures which would be limited to a specific sector or commodity as they would
contribute to increasing the fragmentation of due diligence requirements across sectors
and commodities, creating further legal uncertainty. However, in the implementation of
any overarching EU level regulations on mandatory due diligence for adverse human
rights and environmental impacts in companies' operations and in their supply chains,
considerations will need to be given to the specificity of such sectors.
In this context, the TOR refers to the examples of the agricultural subsectors of coffee,
tea and cocoa. As a result, survey respondents were specifically asked about their
involvement in these subsectors, the findings of which are set out in the Market Practices
sector. Given the general mandate of this study, and the samples, it is not relevant to
provide detailed findings in accordance with specific subsectors.
The literature analysed similarly sets out the position in relation to these subsectors as
they are relevant to due diligence developments. The cocoa subsector in particular has
been linked by various studies and stakeholders (see the Market Practices section) to
issues of child labour and deforestation.622 For example, a recent report of Fern
Tropenbos International and Fairtrade623 which is discussed in further detail throughout
this study, notes the widespread issues prevalent in the cocoa sector and the limitations
of voluntary initiatives “such as certification schemes and company programmes” to
“tackle these problems”:
There is increasing acknowledgement, however, that while these current
initiatives have had some positive impacts, they have not succeeded, and are not
likely to succeed, in tackling low prices and poverty, child labour, deforestation
and illegality across the whole cocoa sector.
The report calls for an intervention at the EU level:
Since the EU is the world’s largest importer of cocoa and cocoa products, EU
consumption, and any standards it imposes on imports, has the potential to affect
the conditions of production in the countries of origin. There is, accordingly, a
strong case that EU-wide government action or regulation should be considered,
but as yet there is no consensus on what it might be.
In applying to concept of due diligence to these subsectors it should be taken into
consideration that they mainly rely on smallholders.624 This could be done in non-binding
guidance accompanying any general regulation, as discussed further in the Problem
Analysis and Regulatory Options section.625
3.7 Due Diligence for child labour
Survey respondents expressed their views against regulatory measure which focuses on
one specific issue, such as child labour or modern slavery (which were the specific
622 Mighty Earth, authored by Etelle Higonnet, Marisa Bellantonio and Glenn Hurowitz, “Chocolate's Dark Secret: How the
Cocoa Industry Destroys National Parks” (August 2019), available at: http://www.mightyearth.org/reports/. 623 Brack above n 586. 624 Ibid at 50. 625 Ibid.
192
examples provided in the survey).626 Instead, the majority of survey respondents across
the spectrum agreed that regulation should cover all human rights and environmental
impacts. Interviewees and survey respondents in optional text boxes similarly noted that
issue-specific regulation creates further fragmentation and risk detracting attention from
other adverse human rights impacts, by incentivising companies to prioritize efforts to
address a particular issue to the detriment of other potentially more salient human rights
issues in the supply chain of a particular company.627 These findings are discussed and
analysed in the Market Practices and Problem Analysis and Regulatory Options sections
respectively.
As a result, and given the mandate of the study referring to a general due diligence
framework, an issue-specific sub-option was not included within the regulatory options.
Nevertheless, insofar as the TOR expressly refers to child labour, the definition of human
rights provided to survey participants expressly referred to child labour. The impacts on
child labour were also included in the detailed questions about possible regulatory
impacts posted to survey respondents. Interviewees included experts at international
organisations and NGOs which specialize in due diligence for child labour. In addition, an
analysis of issue-specific regulation is covered in the Market Practices, the Regulatory
Review, the Country Reports, the Problem Analysis and Regulatory Options and the
Assessment of Options.
In particular, the example of the 2019 Dutch Child Labour Due Diligence Law, which was
adopted during the course of this study, is discussed throughout the study, and in
particular detail in the Netherlands Country report.
4. Domestic frameworks
4.1 Country reports: Twelve selected EU Member States
At domestic level, due diligence requirements have been developed and applied in
various ways. This section reviews the relevant laws and standards requiring due
diligence for human rights and environmental impacts in twelve EU Member States,
namely Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands,
Poland, Spain, and Sweden, and the UK.
The country reports were authored by country expert reporters with expertise in the
relevant domestic legal system. For ease and clarity, the country reports will follow
below as standalone sections, like chapters in a book. The authors of each country report
are named under each respective country heading.
The country reports are preceded by an overview of their findings, authored by Professor
Robert McCorquodale for BIICL.
4.2 Other domestic developments
This section briefly considers some relevant developments in countries outside of the EU.
626 The majority (47.06%) of business respondents preferred regulation to apply across all issues. Less than half of this number (23.53%) preferred regulation which focuses only on one issue such as modern slavery or child labour. Only 4.9% (the
least selected option, below no preference), preferred “[i]ssue-specific regulation covering another specific human rights or
environmental issue”. Similarly, general respondents expressed a very strong preference (74.15%) for “[r]egulation which
covers all EU-recognised human rights and environmental impacts.” Only 9.52% expressed a preference for issue-specific
regulation “for example covering only issues of child labour or modern slavery”. The least selected option by only 2.04% of
general survey respondents was “[i]ssue-specific regulation covering another specific human rights or environmental issue”. 627 See discussions in Section IV Problem Analysis and Regulatory Options.
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4.2.1 Switzerland
In Switzerland, the Popular Initiative on Responsible Business was launched by the Swiss
Coalition for Corporate Justice after having collected the requisite threshold of 100,000
signatures from Swiss citizens.628
The Swiss Responsible Business Initiative seeks to impose direct human rights and
environmental obligations on Swiss-based companies and introduce mandatory due
diligence across all sectors through a revision of the Swiss Constitution. In particular, it
proposes to add an article 101a entitled “Responsibility of Business” to the Swiss
Constitution empowering the Swiss government to take legislative measures in order to
regulate the obligations of Swiss-based companies with regard to human rights and the
environment. Paragraph 2.a of Article 101a of the Initiative states:629
[C]ompanies must respect internationally recognized human rights and
international environmental standards, also abroad; they must ensure that
human rights and environmental standards are also respected by companies
under their control.
Paragraph 2.b of Article 101a requires Swiss-based companies to carry out “appropriate
due diligence” so as to:630
[I]dentify real and potential impacts on internationally recognized human rights
and the environment; take appropriate measures to prevent the violation of
internationally recognized human rights and international environmental
standards, cease existing violations, and account for the actions taken.
The due diligence requirements under the Swiss Initiative apply to “controlled companies
as well as to all business relationships”. In Swiss Law, “controlled companies” usually
refer to subsidiaries of parent companies. However, the concept can also encompass
other entities over which the company exercise economic control, such as the supplier of
a Swiss company which is its only purchaser.631 The concept of “controlled companies”,
which is not a concept familiar to UNGPs terminology, is narrower than the UNGPs's
reference to “leverage”.632
In terms of scope, the Responsible Business Initiative covers all the companies that have
their registered office, central administration or principal place of business in
Switzerland. The text of the draft acknowledges that the needs of small and medium-
sized companies that have limited risks of this kind are to be taken into account.633
Paragraph 2.c of the text provides for a specific liability regime of Swiss companies for
the extraterritorial damages “caused by the companies under their control” where these
companies have “in the course of business, committed violations of internationally
recognized human rights or international environmental standards”. This regime has
been modelled on the existing Swiss provision concerning principal or vicarious
liability.634 The text of the initiative provides that the controlling companies are not liable
if they can prove that they carried out their due diligence obligations appropriately. In
that respect, it provides for a reversal of the burden of proof which addresses some of
628 Bueno above n 587 at 12. 629 SCCJ “Initiative Text” above n 493 at para 1.a. 630 Ibid. 631 Ibid at para 1. 632 UNGP 19. 633 Ibid at para 1.b. 634 Ibid at para 2.
194
the hurdles encountered by claimants in bringing evidence concerning the conduct of
controlled companies located abroad.635
On 14 June 2018, the National Council adopted a counter-proposal of the text, which is
less ambitious than the original text of the Swiss Responsible Business Initiative.636 In
particular, the counter-proposal is narrower in terms of scope as it applies to companies
exceeding two of the three following thresholds: a balance sheet total of 40 million
CHF/USD; a turnover of 80 million CHF/USD; or 500 full-time employees.637 It also
applies to SMEs with particular high risk activities. In addition, the liability regime is
limited to parent companies for the damage caused by effectively controlled
subsidiaries.638 It is also limited to damage to life and limb or property that are the result
of a violation of international standards which have been ratified by Switzerland.639
Nicolas Bueno writes about the Swiss National Council legislative proposal:640
After setting the general goal of the initiative in Paragraph 1, the initiative text
entails three elements to implement this goal in Paragraph 2. First, Article
101a(2)(b) introduces and defines the scope of a mandatory due diligence
provision in the Swiss Constitution. Article 101a(2)(c) then addresses the liability
of companies based in Switzerland, including their liability for harm caused by
companies under their control. Finally, Article 101a(2)(d) aims to ensure that the
introduced mandatory due diligence and liability provisions will apply even though
the human rights or environmental-related harm typically occurs abroad.
Bueno further adds:641
Concretely, the introduction of a mandatory due diligence provision objectifies the
expected conduct that Switzerland-based companies must apply with a view to
preventing adverse human rights and environmental impacts in Switzerland and
abroad. In this regard, the text of the initiative does not distinguish between the
three scenarios presented above: causing an adverse impact, contributing to an
adverse impact through the enterprise’s own activities, and adverse impacts
directly linked to the enterprise’s operations by a business relationship. It broadly
states that due diligence ‘duties apply to controlled companies as well as to all
business relationships’. However, according to the explanation of the initiative
text, section (2)(b) introduces a mandatory due diligence provision based on the
UNGPs and the OECD Guidelines for Multinational Enterprises. Therefore, the
international framework may provide guidance on how to interpret the text of the
initiative. Although not expressly referenced in the text, this standard of conduct
should also help to identify whether a company has committed a fault and should
be held liable for its own actions and omissions on the basis of the general tort of
negligence.
On 18 December 2019, the Council of States adopted another proposal in which the due
diligence requirements would be restricted to the conflict minerals sector and to
enterprises providing goods and services in Switerland for which there is a reasonable
suspicion that they have been supplied or produced using child labour. This proposal also
no longer contains the civil liability mechanism. The two chambers of the Swiss
Parliament will discuss these two parliamentary proposals in first half of 2020, and,
635 Ibid. 636 SCCJ, “How does the parliamentary counter-proposal differ…?” above n 493. 637 Ibid. 638 Ibid. 639 Ibid. 640 Bueno above n 587 at 13. 641 Ibid at 14.
195
depending on the outcome of these dicussions, the Swiss citizens may be called upon to
vote on the initial Swiss Responsible Business Initiative later in 2020.
4.2.2 Norway
One example of legislation in Norway which is relevant for our purposes is the Norwegian
law on gender parity in boards of public limited liability companies.
On 1 January 2006, section 6-11a of the Norwegian Public Limited Liability Companies
Act was introduced, which made it compulsory for public limited liability companies to
have at least a 40 per cent of women in their boards:
§ 6-11a. Requirement regarding the representation of both sexes on the board of
directors
(1) On the board of directors of public limited liability companies, both sexes
shall be represented in the following manner:
1. If the board of directors has two or three members, both sexes shall be
represented.
2. If the board of directors has four or five members, each sex shall be
represented by at least two members.
3. If the board of directors has six to eight members, each sex shall be
represented by at least three members.
4. If the board of directors has nine members, each sex shall be represented
by at least four members, and if the board of directors has more members, each
sex shall represent at least 40 percent of the members of the board.
5. The rules in no. 1 to 4 apply correspondingly for elections of deputy
members of the board of directors.
(2) The first paragraph does not apply to members of the board of directors who
have been elected among the employees pursuant to § 6-4 or § 6-37 first
paragraph. When two or more members of the board of directors as mentioned in
the first paragraph are elected, both sexes shall be represented. The same
applies to deputy directors. The provisions in the second and third sentence do
not apply if one of the sexes is represented by less than 20 percent of the total
number of employees in the company at the time of election.642
The entry into force was triggered by the inaction of the companies to introduce changes
voluntarily, as it provided that the new wording would entry into force “only if companies
did not, by 1 July 2005, in aggregate have 40 per cent representation by women on their
boards”.643 The Act gave companies a two-year period to comply. Despite some protests,
all the relevant companies complied with the period set. The standard applies to all
public limited liability companies in Norway, but did not affect the composition of the
boards of private companies.
In case of breach with the provision, the sanctions could vary from denial of registration
in the Register of Business Enterprises to the dissolution of the company.
This example from Norway shows how human rights-related requirements could
potentially be introduced into company law.644 It also demonstrates how mandatory
642 Allmennaksjeloven, lov av 13. Juni 1997 nr. 45 (Norwegian Public Limited Liability Companies Act of 13 June 1997 No 45),
available in an unofficial English translation at the website of the Oslo Stock Exchange (Oslo Børs) at
https://www.oslobors.no/ob_eng/Oslo-Boers/Regulations/Acts-and-regulations. 643 Beate Sjåfjell, "Gender Diversity in the Board Room & Its Impacts: Is the Example of Norway a Way Forward?" Social
Science Research Network, SSRN Scholarly Paper ID 2536777 28 (2014), available at:
https://papers.ssrn.com/abstract=2536777. 644 Ibid at 50.
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legislation can bring about changes which voluntary mechanisms were unable to
incentivise.645
Another development that is not yet legislative in nature is also of relevance. A
Norwegian Ethics Information Committee was appointed to explore possible disclosure
requirements relating to production sites used in manufacturing, as well as responsible
business conduct and supply chain management.646 If taken forward, this may entail an
amendment to existing legislation, such as the Norwegian Environmental Information
Act, or the proposal of a new law.
In November 2019, Norway released a draft Act relating to transparency in supply
chains.647 The draft legislation provides for a twofold duty: a ”duty to know of salient
risks that may have an adverse impact on fundamental human rights and decent work”,
which would apply to all companies offering goods or services in Norway, and a duty to
disclose information about the company's adverse impacts on human rights and working
conditions and significant risks thereof, and about its due diligence processes, as well as
to actually undertake due diligence, which would be limited to larger companies.648
4.2.3 Canada
The Canadian Ombudsperson for Responsible Enterprises (“CORE”) aims to review
allegations of human rights abuses arising out from the operations of Canadian
companies abroad. On the 8th of April, 2019, Sheri Meyerhoffer was appointed by the
Minister of International Trade Diversification as the new Ombudsperson.649
Criticisims have been raised as to the lack of powers and independence granted to the
Ombudsperson.650 In particular, concerns were raised in relation to her lack of
investigatory powers to compel documents or witnesses;651 her lack of ability to
recommend sanctions for companies that have been found to have caused, or
contributed to, human rights abuses (such as the denial or withdrawal of trade advocacy
support and future Export Development Canada financial support);652 and the
requirement for the reports prepared by the Ombudsperson to be provided to the
Minister of International Trade (and to the Minister of Natural Resources for the reports
concerning companies in the mining, oil or gas sectors) before being published.653
4.2.4 Australia
The Australian Modern Slavery Act entered into force on 1 January 2019. It requires
companies carrying out at least part of their business in Australia (regardless of where
645 Ibid. 646 Information on the Norwegian Ethics Information Committee is available at:
https://nettsteder.regjeringen.no/etikkinformasjonsutvalget/norwegian-ethics-information-committee/. 647 Report from the Ethics Information Committee, appointed by the Norwegian government on June 1, 2018. Report delivered on November 28, 2019. Draft translation from Norwegian of sections of Part I. Available at: https://www.business-
humanrights.org/sites/default/files/documents/Norway%20Draft%20Transparency%20Act%20-
%20draft%20translation_0.pdf. See also BHRRC, "Norway: Government-appointed committee proposes human rights
transparency and due diligence regulation", available at: https://www.business-
humanrights.org/sites/default/files/documents/Norway%20Draft%20Transparency%20Act%20-%20draft%20translation_0.pdf 648 Ibid., Sections 5 and 10. 649 Global Affairs Canada "Minister Carr announces appointment of first Canadian Ombudsperson for Responsible Enterprise" (8
April 2019), available at : https://www.canada.ca/en/global-affairs/news/2019/04/minister-carr-announces-appointment-of-
first-canadian-ombudsperson-for-responsible-enterprise.html. 650 Catherine Coumans, "Canada Still Needs an Ombudsperson to Investigate Mining Cases - Not an Advisor to the Minister of International Trade or another CSR Counsellor", Miningwatch, 4 May 2019, available at :
https://miningwatch.ca/blog/2019/5/4/canada-still-needs-ombudsperson-investigate-mining-cases-not-advisor-minister. 651 Peter Mazereeuw, "Canada must ‘walk the talk’, give corporate ethics watchdog power to compel evidence: UN expert", The
Hill Times (29 April 2019), available at: https://www.hilltimes.com/2019/04/29/canada-must-walk-the-talk-give-corporate-
ombudsperson-more-powers-and-budget-un-expert/198285. 652 Coumans above n 650. 653 Ibid.
197
they are domiciled),654 with a consolidated revenue of at least Aus$100 million to report
disclose on the steps they have taken to identify and address risks of modern slavery, as
well as how they assess the effectiveness of their actions.655 The law establishes
reporting criteria against which companies must report,656 and statements must be
approved by the “principal governing body” of the entity.657 The Australian act also
provides for the establishment of a government-run registry of statements: the Modern
Slavery Statements Register,658 but does not require the publication by the competent
authorities of a list of entities required to report.
Chiara Macchi and Claire Bright have noted in relation to the Australian Modern Slavery
Act that:659
While the Australian Act can be seen as ‘a step in the right direction’, and
relatively more advanced than the UK MSA, its effectiveness in contributing to the
implementation of the UNGPs suffers largely from the same limitations
highlighted for the UK MSA. In particular, it suffers from a lack of independent
oversight and of effective machinery for enforcement with no penalties or civil
liability regime envisaged in case non-compliance.
4.2.5 United States of America
The California Transparency in Supply Chains Act (the “California Act”),660 adopted in
2010, requires certain companies to report on their efforts to combat slavery and human
trafficking in their supply chains.661 Studies which raise concerns around its effectiveness
have been mentioned above.662
In addition, the US Trade Facilitation Act allows US Customs to seize imported goods if
an importer is unable to provide a certificate proving which measures were taken ensure
that the goods were not produced using forced labour.
In April 2019, a coalition of human rights and environmental civil society organisations
proposed that the US Congress consider a draft Corporate Transparency Act, which
would require disclosure of beneficial ownership for the purposes of addressing
corruption, money-laundering and human rights and environmental harms.663
4.2.6 Brazil
In Brazil, two relevant developments are interesting for the purposes of due diligence.
The first relates to a case which was successfully brought against Zara for human rights
conditions in its supply chain. The second relates to the publication of the “Dirty List” of
companies which have been alleged to have slavery conditions in their operations.
In 2011, the officers from the labour inspection of Brazil found 15 foreign workers
working in two Sao Paolo workshops in conditions which the inspectors concluded to be
654 Sections 4-5 of the Australia Modern Slavery Act above n 512. 655 Section 15(16)(1). 656 Section 15(16). 657 Section 15(13)(2). 658 Section 17(18). 659 Macchi and Bright above n 510. 660 California Transparency in Supply Chains Act of 2010. 661 The stated purpose of the Act is “to educate consumers on how to purchase goods produced by companies that responsibly
manage their supply chains, and, thereby, to improve the lives of victims of slavery and human trafficking.” 662 Development International above n 505. 663 Human Rights Watch, “US: Pass Law to Stem Corruption, Promote Rights: Act Would Require Companies to Disclose Real
Owners” (11 April 2019), available at: https://www.hrw.org/news/2019/04/11/us-pass-law-stem-corruption-promote-rights.
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analogous to slavery.664 The workshops had been subcontracted by AHA, a major
supplier of Zara Brazil at that time.665 The authorities argued that Zara was the real
employer and should be held legally responsible, as it exercised directive power over its
supply chain.666
Following negotiations with labour prosecutors later that year, Zara Brazil and the
authorities reached a Conduct Adjustment Agreement whereby Zara committed to a set
of rules of conduct to avoid criminal proceedings to begin.667
A report by NGOs, SOMO and Repórter Brasil, noted that this was a novel approach by
the Brazilian authorities, as Zara Brazil was one of the first textile companies to be held
accountable for working conditions in an outsourced workshop.668 The Agreement
imposed on Zara an unprecedented obligation to audit its suppliers and subcontractors.
In Brazilian legislation, slave labour conditions occur:669
[W]hen a worker is subjected to one or more of the following situations: forced
labour; exhaustive working hours; degrading working conditions; restriction, by
any means, of movement on account of debt contracted with the employer or
agent, either when they are hired or over the course of the work contract;
retention in the workplace by preventing the use of any means of transport, by
maintaining overt surveillance and/or by confiscating personal documents or
personal property.
As a result of the unfavourable publicity that employers receive from their inclusion in
this public List, there have been fourteen challenges to the legality of the mechanism:
In November 2004 the Confederation of Agriculture of Brazil challenged the
constitutionality of the List in the Supreme Court.670
In 2011, the Ministry of Labour and the Human Rights Secretariat renewed the
List through an inter-ministerial order.671
In 2014, following a challenge by the Brazilian Association of Real Estate
Developers,672 the Supreme Court suspended the publication of the List.
In 2015, the Government issued a ministerial order673 which clarified that
employers could only be listed after the applicable administrative appeals had
been exhausted. The publication of the List remained suspended.
In 2016, an inter-ministerial order674 provided employers with the possibility of
signing a “Conduct Adjustment Agreement”, which constituted a legal settlement.
In this agreement, employers would commit to adjusting their conduct within a
two-year-period. If they failed to do so, they could be included in the List.
664 André Campos, Mariëtte van Huijstee and Martje Theuws, "From Moral Responsibility to Legal Liability? Modern Day Slavery
Conditions in the Global Garment Supply Chain and the Need to Strengthen Regulatory Frameworks: The Case of Inditex-Zara
in Brazil", SOMO and Repórter Brasil (2015) 36, available at: https://www.somo.nl/wp-content/uploads/2015/05/From-moral-
responsibility-to-legal-liability.pdf. 665 Ibid at 34 and 36. 666 Cees Van Dam, Enhancing Human Rights Protection: A Company Lawyer’s Business, Rotterdam School of Management,
Erasmus University (2015) at 36. 667 Campos, van Huijstee and Theuws above n 664 at 38. 668 Ibid at 39. 669 Conectas "The back and forth of the slave labor dirty list in Brazil" (20 February 2018), available at:
https://www.conectas.org/en/news/back-forth-slave-labor-dirty-list-brazil. 670 Direct Claim on Grounds of Unconstitutionality (Ação Direta De Inconstitucionalidade) No. 3347. 671 Inter-ministerial Order 2/2011. 672 Direct Claim on Grounds of Unconstitutionality (Ação Direta De Inconstitucionalidade) No. 5209. 673 Ministerial Order 2/2015. 674 Inter-ministerial Order 4/2016.
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Also in 2016, the Supreme Court per Justice Cármen Lúcia Rocha closed the
pending challenges against the List, declaring that the new rules for its
publication were constitutional.
Following this ruling, the Government of President Michel Termer announced it
would not publish the List. The Office of the Public Prosecutor for Labour Issues
challenged the President’s decision and sought publication of the List. The
Government appealed to the Superior Labour Court, and the President of the
Court, Ives Gandra Martins Filho, granted an injunction to suspend the
publication of the List again.
In 2017, as a result of another appeal by the Office of the Public Prosecutor for
Labour Issues the Superior Labour Court reviewed its previous ruling and ordered
the publication of the List for the first time since 2014.
Later in 2017, the federal government issued a ministerial order675 which subjects
the publication of the List to authorisation by the Ministry of Labour.
In January 2018, the Brazilian Association of Real Estate Developers (Abrainc)
filed another case with the Supreme Court to impede the publication of the
List.676 Abrainc argues that the publication of the List may only be regulated by a
specific law, and not by a ministerial order. The case is pending.
Currently,677 the publication of the Dirty List occurs every six months. It fell under the
responsibility of the Ministry of Labour, but with the extinction of the Ministry of Labour,
the List is meant to be published by the Ministry of the Economy.
4.3 Overview and Comparative Analysis of Country Reports
Robert McCorquodale*
4.3.1 Introduction
This project conducted a deep review of the relevant national laws and other regulation
in relation to due diligence for human rights and environmental matters across 12 EU
jurisdictions. These jurisdictions were: Belgium, Denmark; Finland; France; Germany;
Ireland; Italy; the Netherlands; Poland; Spain; Sweden; and the United Kingdom. These
detailed individual reports of each jurisdiction, written by experts in their field in each
Member State, are set out in this Report.
This comparative analysis considers these individual reports and summarises the key
elements of them. It does so through a framework which draws out some of the main
aspects and trends of the individual reports in relation to human rights and
environmental due diligence on companies.678 It will first set out the areas of law in
Member States in which due diligence has been applied, and what is the legal duty. It
then considers the scope of this application in terms of the types of companies and the
675 Ministerial Order No. 1,129/2017. 676 Claim on Grounds of Constitutional Infringement (Arguição de Descumprimento de Preceito Fundamental) No. 509 677 Following the suspension of Ministerial Order No. 1,129/2017 by Justice Rosa Weber at the Supreme Court. * Robert McCorquodale is Professor of International Law and Human Rights at the University of Nottingham, United Kingdom,
barrister at Brick Court Chambers, London and Founder and Principal of Inclusive Law. 678 The terminology of “companies” is used here as it is the term generally used in these Country Reports. The legislation is
summarised and abbreviated in this chapter as the full terminology of the legislation can be found in the individual Country
Reports. The footnotes cited in this section contain the original formatting provided by the experts in their Country Reports. For
further details please see the individual Country Reports in Part III Country Reports.
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areas of human rights and environment covered, and if it is applied transnationally. It
will examine the application of this to corporate groups and others, followed by
consideration of the monitoring, enforcement and remedies across the jurisdictions, with
comments on the links to EU laws where relevant. This comparative analysis is primarily
in relation to existing laws in these Member States, with some reflections on proposed
laws.
4.3.2 Areas of law
The breadth of the areas of national law which have aspects of due diligence for human
rights and environmental matters is extensive. It primarily includes many areas of
corporate law, such as general company law and laws regarding financial statements,679
as well as in stock exchange listing requirements680 and in money-laundering
legislation.681
Other areas of law for which most Country Reports noted that they had some form of
human rights and environmental due diligence requirements, were health and safety
law,682 product liability law,683 employment law684 and environmental law.685 Some
Country Reports traced due diligence requirements to their constitutional and public
law,686 consumer law,687 equality law,688 and bribery law,689 as well as in the
consideration of public procurement law.690 In addition, there is the Vigilance Law in
France,691 which is legislation specifically focussed on due diligence for human rights and
environmental impacts, as well as the Child Labour Due Diligence Law in The
Netherlands692 and Modern Slavery Act in the United Kingdom, both of which cover a
more limited range of human rights.693 There is also a proposal in Germany for a broad-
based mandatory due diligence law.694
These Country Reports indicate that some Member States have chosen a regulatory
method that is less legislation based. This includes The Netherlands’ approach to specific
sector guidance695 and the Danish approach to export credit.696 Most Member States
have corporate governance codes, which are not legally binding but highly influential in
the area of due diligence.697 There is also regulation on the broad area of corporate
social responsibility (CSR) in some Member States – which is often confused with specific
679 For example, Denmark’s Financial Statements Law, Ireland’s Companies Act, Spain’s Law amending the Commercial Code and Sweden Annual Account Act. 680 For example, Spain’s Royal Legislative Approving the Consolidated Text of the Law of the Stock Market. 681 For example, Sweden’s Money Laundering and Terrorist Financing (Prevention) Act and United Kingdom’s Money
Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations. 682 For example, Finland’s Consumer Safety Act, Italy’s Consolidated Text on Health and Safety at Work and United Kingdom’s
Food Safety Act. 683 For example, Germany’s Act on Liability for Defective Products. 684 For example, Poland’s Act amending the Labour Code, Spain’s Law on Prevention of Occupational Risks and the United
Kingdom’s Equality Act. 685 For example, Germany’s Water Resources Act, Italy’s Law on Decontamination of Polluted Sites and Poland’s Environmental
Damage Act. 686 For example, Article 45 of the Spanish Constitution and Denmark’s Act on a Mediation and Complaints-Handling Institution
for Responsible Business Conduct. 687 For example, United Kingdom’s Consumer Protection Act. 688 For example, Ireland’s Human Rights and Equality Commission Act. 689 For example, United Kingdom’s Bribery Act. 690 For example, Denmark’s Public Procurement Act, Germany’s Law against Restraints of Competition and Finland’s Act on
Public Procurement and Concession Contracts. 691 France’s Law No 2017-399 of 27 March 2017 (Vigilance Law). 692 The Netherlands Child Labour Due Diligence Act 2019. 693 United Kingdom’s Modern Slavery Act 2015. 694 Draft German Law on Corporate Human Rights and Environmental Due Diligence in Global Value Chains 2019. 695 For example, The Netherlands’ international responsible business conduct (IRBC) Agreement on Sustainable Garment and
Textile. See also the German Partnership for Sustainable Textiles. 696 See Danish Institute of Human Rights, Erhverv og menneskerettigheder i en dansk kontekst (2016) 25. 697 For example, Belgium’s Code on Corporate Governance and Spain’s Good Governance Code of Listed Companies.
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human rights regulation698 – with a range of non-binding initiatives.699 These Country
Reports all consider relevant developments in relation to tort and contract law that can
be either legislative based or in case law,700 and within criminal law.701
Throughout the Country Reports it is evident that Member States have brought in
legislation specifically to implement EU law. The main area where this is evident is the
inclusion in each Member State of corporate law in relation to non-financial reporting. In
each case, this has been due to the influence of the EU Directive on Non-Financial
Reporting.702 Yet it is also clear that many other relevant national laws have been passed
due to EU laws.703
It is, therefore, evident that human rights and environmental due diligence is a practice
and process that is applied in many and diverse laws across Member States, and is not
at all unfamiliar in these national laws. This due diligence is expressly related to human
rights and environmental matters, even if not always using the specific term of “human
rights due diligence”.
4.3.3 The Legal Duty
The focus of the Country Reports is on those national laws and other regulations which
are relevant to human rights and environmental due diligence. It is evident from these
12 Country Reports that the terminology of the regulations varies considerably in this
regard. The legal duty on companies has been expressed, for example, as a duty to
respect, a duty to prevent, a duty to meet a certain standard, a duty to implement
process, a duty to report and a duty of care.
A useful example of this diversity of uses of due diligence obligations on companies is
that of German law. As set out in the German Country Report, the German legal order
contains examples of different types of due diligence obligations, including precautionary
duties, supervision duties, protective duties and safety duties, whose concrete scope and
content is tailored to the respective purpose of the law and the risks it aims to address.
All these due diligence obligations are subject to standards of reasonableness,
appropriateness, adequacy, cost-benefit analysis, etc., which ultimately give effect to the
proportionality principle that the measure deployed is not out of proportion with the goal
pursued. This entails that the more severe a measure interferes with human rights and
the environment, the weightier is the public interest in regulation. These due diligence
standards are fleshed out in German law with regard to the type of risk to be addressed,
the likelihood and severity of the impact or damage to be expected, and the economic
costs involved in minimising or excluding the risk. In this regard, the specific
precautionary duties in environmental law aim to address risks whose materialisation is
possible yet not sufficiently probable to trigger a more robust duty of protection.704 This
is of particular importance where the damage may prove irreversible.
In addition, under German law corporate due diligence obligations are limited by a
notion of “adequacy” [Angemessenheit] that applies at the risk analysis stage. In
German law, adequacy requires a proportionate relationship between means and ends.
698 On the difference between CSR and human rights, see, for example, Karin Buhmann, Jonas Jonsson and Mette Fisker, “Do
No Harm and Do More Good Too: Connecting the SDGs with Business and Human Rights and Political CSR Theory, Corporate
Governance, November 2018. 699 For example, Denmark’s CSR Compass and Spain’s CSR Strategy. 700 For example, Germany’s Due Diligence Obligations in the Law of Non-Contractual Obligations, Belgium’s general contract law, and United Kingdom’s common law. 701 For example, Italy’s Administrative Responsibility of Legal Entities, Companies and Associations Act. 702 EU Directive on Non-Financial Reporting, EU Directive 2014/95/EU. 703 For example, Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public
procurement and Directive 89/391 on labour rights. 704 Such as laid down in Article 5 I(1) No 2 of the Act on the Protection of Humans, Animals and the Environment against
Harmful Emissions.
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In relation to due diligence, there are some examples in the Law regulating the Credit
System, which provides that “proper business administration must include adequate and
effective risk management, on the basis of which the credit institute must continuously
ensure its risk-bearing capacity”,705 and the Money Laundering Act, where companies
have to demonstrate that the scope of due diligence measures taken is “adequate” in
relation to the risks of money laundering and terrorist financing.706 In the proposed
German Legislation on Corporate Human Rights and Environmental Due Diligence in
Global Value Chains, it specifies that in order to satisfy the requirement of adequacy,
business enterprises have to conduct an “enhanced risk analysis” whenever they become
aware of concrete risks of human rights impacts.707
Polish law has another concept being that of due care [należyta staranność].708 As
explained in its Country Report, it is due care that the Polish legal system most often
identifies as an objective criterion for assessing the behaviour of an entity to which to
attribute liability for non-performance or improper performance of an obligation, or for
tort or delict. The standard must take into account the special ability to predict pre-
emptiveness and reliability in the way a professional works, and the large requirements
in terms of their knowledge and practical skills or professionalism. It should be
emphasized that it is also about the knowledge that goes beyond the scope of specialist
information in a given field but is essential for professional activity.709
In contrast, the terminology in The Netherlands Child Labour Due Diligence Act is
expressly that of “due diligence”. As set out in the Netherlands Country Report, there is
a requirement for the companies involved to conduct due diligence [gepaste
zorgvuldigheid] with a view to preventing child labour from being used in the production
of the goods and services they supply to Dutch end-users, as part of consumer
protection (rather than about transparency). According to the Act:
[t]he company that … investigates whether there is a reasonable presumption that the
goods and services to be supplied have been produced using child labour, and that
draws up and carries out an action plan in case there is such a reasonable presumption,
conducts due diligence.710
The due diligence requirement is not defined further in the Act, other than it mentions
that more detailed requirements with respect to both the investigation and the action
plan will be set by General Administrative Order, taking account of the existing
International Labour Organization’s Child Labour Guidance Tool for Business.711
Interestingly, the term “due diligence” (in Dutch and English) is used for the Dutch
international responsible business conduct (IRBC) Covenants.
In contrast, the French Vigilance Law does not use the term “due diligence”. The France
Country Report notes that the vigilance obligations under the Vigilance Law shares
commonalities with the human rights due diligence process provided by the United
Nations Guiding Principles on Business and Human Rights (UNGPs) and the OECD
Guidelines for Multinational Enterprises. Indeed, it is accepted that these were
inspirations for the Vigilance Law.712 Yet, these vigilance obligations and the UNGP’s due
705 Article 25a I, Geran Law regulating the Credit System. What is required for adequate risk management depends on the
type, scope, complexity, and risks inherent in the business activity. 706 Article 15, German Money Laundering Act. 707 Article 5 III, proposed German Legislation on Corporate Human Rights and Environmental Due Diligence in Global Value
Chains. 708 Article 355(1) of the Polish Civil Code. 709 See A. Olejniczak. Art. 355, in A Kidyba (ed) Kodeks cywilny. Komentarz. Tom III. Zobowiązania - część ogólna (2nd
edition, LEX, 2014). 710 Article 5(1), The Netherlands Child Labour Due Diligence Act. 711 Ibid, Article 5(2). 712 See Stéphane Brabant, Elsa Savourey and Charlotte Michon, The Vigilance Plan: Cornerstone of the Corporate Duty of
Vigilance Law, International Review of Compliance and Business Ethics Revue Internationale de la Compliance et de l'Ethique
des Affaires December 2017, p.4.
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diligence are not considered to be identical. Companies within the scope of the Vigilance
Law have to establish a vigilance plan setting out: 713
[R]easonable vigilance measures adequate to identify risks and to prevent severe
impacts on human rights and fundamental freedoms, on the health and safety of
persons and on the environment, resulting from the activities of the company and
of those companies it controls within the meaning of II of article L. 233-16,
directly or indirectly, as well as the activities of subcontractors or suppliers with
whom there is an established commercial relationship, when these activities are
related to this relationship.
This terminology refers to "reasonable vigilance measures" [mesures de vigilance
raisonnable], rather than the UNGPs procedural terminology [procédure de diligence
raisonnable]. In addition, the term "vigilance" is preferred in French law to "duty of
care", on the basis that the common law duty of care does not exist in France.
The duty of care does exist in the United Kingdom in tort law, as a company may be
found liable in negligence if it is established that the company owed a duty to the
claimant, it then breached that duty and caused the claimant to suffer loss which is
recoverable. The United Kingdom’s Supreme Court has found that a parent company can
owe a duty of care to those harmed by the actions of its foreign subsidiary, on the basis
that:714
[T]here is nothing special or conclusive about the bare parent/subsidiary
relationship, it is apparent that the general principles which determine whether A
owes a duty of care to C in respect of the harmful activities of B are not novel at
all.
Nevertheless, as stated in the United Kingdom’s Country Report, some United Kingdom
regulation does refer directly to due diligence, for example, an obligation to take
reasonably practicable steps to avoid a harm to a stakeholder, or as part of a failure to
prevent obligation (such as under the United Kingdom Bribery Act) or as a defence to
the occurrence of a liability. A key feature of “due diligence” in all of these different
contexts in the United Kingdom is the element of objectivity. In other words, in each
case risk management steps taken by a company to avoid liability accruing under a law
will not amount to “due” diligence unless it meets an objective standard (yet to be
clearly defined). It is apparent that any due diligence carried out by a company must be
proportionate to the risks of the unwanted event occurring, taking into account the
business’ complexity, size and operating context.715
Other Member States have laws which use due diligence in a variety of ways. For
example, in the Spain Country Report, it is noted that in the Spanish law on the
Prevention of Money Laundering and Terrorist Financing the term “due diligence”
[diligencia debida] is used and that there is, depending on the risk, different levels of
application of due diligence measures: normal due diligence; simplified due diligence;
and enhanced due diligence measures. In normal due diligence, a company shall conduct
ongoing monitoring of the business relationship, including scrutiny of transactions
undertaken throughout the course of that relationship to ensure that the transactions
being conducted are consistent with their knowledge of the customer, the business and
risk profile, including the source of funds and to ensure that the documents, data and
information held are kept up-to-date.716 Simplified due diligence measures apply with
713 Vigilance Law; Commercial Code, article L. 225-102-4.-I. 714 Vedanta Resources plc v Lungowe and Others [2019] UK SC 20, paragraph 54. 715 See UN Guiding Principle 17(b), which provides that human rights due diligence will “vary in complexity with the size of the
business enterprise, the risk of severe human rights impacts, and the nature and context of its operations”. 716 Article 6, Prevention of Money Laundering and Terrorist Financing.
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respect to those customers, products or transactions that involve a low risk of money
laundering or terrorist financing, and enhanced due diligence applies where the risks are
high. In contrast, under the Italian law on Health and Safety at Work, the focus is on risk
assessment, where, in order to assess the risks of a work situation, it is necessary to
carry out a form of due diligence that identifies all the dangers connected with the
activity carried out and quantifies the risk, that is the probability that each danger turns
into an adverse event, taking into account the entity of the potential damage. 717
Similar to the position in the United Kingdom, a defence of due diligence is available
under certain Italian laws, such as in the case of a crime committed by a company’s
representatives or employees.718 This defence of due diligence is recognised in Finnish
law719 and the Irish Criminal Justice (Corrupt Offences) Act, provides that “it shall be a
defence for a body corporate against which such proceedings are brought to prove that it
took all reasonable steps and exercised all due diligence to avoid the commission of the
offence”.720
Overall, there are a variety of terms used in national law for due diligence in relation to
human rights and environmental matters. Even where the terminology of “due diligence”
is not used, the intent is to place a legal obligation on a company to undertake a risk
assessment, with clear processes, and with the risk to those other than the company –
being employees, consumers, and other stakeholders – as the main focus. It is,
therefore, evident that a use of the term “due diligence” in relation to human rights and
the environment in any EU legislation would not be a problem for harmonisation within
the Member States surveyed.
4.3.4 Scope
The issue of scope of these national laws on due diligence concerns the type and size of
companies covered by the laws and the breadth of human rights and environmental
matters included. One of the most extensive of these laws is found in Italy’s
Administrative Responsibility of Legal Entities, Companies and Associations Act, which
applies to all “corporate entities and companies and associations, regardless of whether
they have legal personality”,721 other than state bodies, and to those human rights and
environmental violations which are also crimes.722 Similarly, Italy’s health and safety law
provides that the Risk Assessment Document is mandatory for all companies that have
at least one employee or one collaborator, and must be drawn up within 90 days for a
new activity.723
Other national laws limit their scope to certain sizes of companies. For example, the
French Vigilance Law provides that the following companies are included within its
scope:724
Any company that employs, by the end of two consecutive financial years, at
least five thousand employees itself and in its direct or indirect subsidiaries whose
registered office is located within the French territory, or at least ten thousand
employees itself and in its direct or indirect subsidiaries whose registered office is
located within the French territory or abroad, shall establish and effectively
implement a vigilance plan.
717 Articles 17, 28 and 29, Italy’s Law on Health and Safety at Work. 718 Italy’s Administrative Responsibility of Legal Entities, Companies and Associations Act. 719 Finnish Act on Compensation for Environmental Damage, Section 7. 720 Section 18(2), Irish Criminal Justice (Corrupt Offences) Act. See also section 10 of the Irish Employment (Miscellaneous
Provisions) Act. 721 Article 1, Italy’s Administrative Responsibility of Legal Entities, Companies and Associations Act. 722 Ibid, Article 25. 723 Article 4, Italy’s Health and Safety Law. 724 Commercial Code, article L. 225-102-4.-I, as introduced by France’s Vigilance Law.
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In addition, the company’s vigilance plan must include “severe impacts on human rights
and fundamental freedoms, on the health and safety of persons and on the
environment”.725 In contrast, The Netherlands Child Labour Due Diligence Act applies to
every company, whether domiciled in the Netherlands or not, and whether listed or not,
which supplies goods or services to Dutch end-users, being “the natural or legal persons
that use or use up the goods or make use of the services”.726 Also included are foreign
companies that have a branch or structurally conduct business in the Netherlands,727
though it excludes companies that only transport the goods.
However, the proposed German Legislation on Corporate Human Rights and
Environmental Due Diligence in Global Value Chains seems to apply just to “major
companies”, though it can extend to “other companies” and subsidiaries controlled by
their parent company, provided these companies (a) operate in a “high risk sector”,
being defined as agriculture, forestry and fishery; mining; manufacturing industries,
including food, textile and electronics; and energy supply or (b) operate in conflict-
affected or high-risk areas.728 Its human rights scope is expansive as it includes all
“internationally recognised human rights” (listed in an annex) and “basic environmental
requirements”, which cover any environmental legislation of the State where the damage
occurs and international treaties that bind Germany. By comparison, the scope of
companies within the United Kingdom’s Modern Slavery Act is limited by turnover, as it
only applies to a company which carries on a business, or part of a business, in the
United Kingdom, supplies goods or services and has an annual turnover of £36 million or
more (globally).729 The Act also deals solely with slavery, servitude and forced or
compulsory labour, as well as human trafficking.
In relation to corporate law more generally, every Member State has implemented the
EU Directive on Non-Financial Reporting, with almost all adopting the full scope of the
Directive.730 Accordingly, in most Member States listed companies with 500 employees
or more are required to provide a report, though Denmark and Sweden extend this by
requiring companies with 250 employees or more, including state companies, or having
a certain turnover, to prepare a report. Some Member States have extended the
Directive’s scope in other ways, as France includes some unlisted companies that are
above certain financial and employee thresholds, Spain includes public interest financial
companies (such as banks, insurance companies, investment fund managers and
pension funds), and Italy includes some turnover aspects to extend its scope (20 million
euros of total assets from the balance sheet, and/or 40 million euros from revenues net
sales). All of the Member States in this Report require companies to report on the same
environmental, social or governance factors, though France and Italy’s scope in this
regard are slightly broader.731
Some Member States specifically extend the obligations of due diligence to state or
public sector companies. For example, the Irish Human Rights and Equality Commission
Act requires public entities to undertake human rights due diligence, and those duties
extend to all government departments, local authorities, and other public authorities,
and also to companies “wholly or partly financed” or where a majority stake is owned by
the Irish government.732 Similarly, Sweden requires state-owned companies’ boards of
725 Legislative Decree 9 April 2008, n. 81 Consolidated Text on Health and Safety at Work, para. 3. 726 Child Labour Due Diligence Act, Preamble. 727 Article 5d, Dutch Commercial Register Act. 728 Article 3, proposed German Law on Corporate Human Rights and Environmental Due Diligence in Global Value Chains. 729 Section 54(2), United Kingdom’s Modern Slavery Act. 730 See GRI and CSR Europe, Policy & Reporting: Member State Implementation of Directive 2014/95/EU (2018),
https://www.globalreporting.org/resourcelibrary/NFRpublication%20online_version.pdf. 731 For a useful summary, see Frank Bold, Comparing the Implementation of the Non-Financial Reporting Directive (2017),
http://www.purposeofcorporation.org/comparing-the-eu-non-financial-reporting-directive.pdf. 732 Irish Human Rights and Equality Commission, Public Sector Equality and Human Rights Duty- FAQ, available at:
https://www.ihrec.ie/our-work/public-sector-equality-and-human-rights-duty-faq/.
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directors to define and adopt sustainability targets and integrate sustainable business
into their business strategies.733
In other specific areas of regulation, the scope of the legislation tends to cover all
companies, such as in the areas of health and safety, and the environment, or for a
range of industry sectors. For example, in Spain an environmental impact assessment is
required for the following sectors: intensive livestock installations; extractive industry;
mineral and steel industries. production and processing of metals; chemical,
petrochemical, textile, paper industries industry; infrastructure projects; hydraulic
engineering and water management projects; waste disposal and recovery projects; and
other projects developed in sites protected under the Natura 2000 Network and in
protected areas by international instruments.734 In relation to the different approach to
regulation in this area in The Netherlands, there are eight IRBC covenants which are
operational. They apply to certain sectors: garments and textile; banking; the gold
sector; the insurance sector; pension funds; sustainable forestry; the food products
sector; and a pilot on natural stone. The different covenants differ in scope, with some
focusing on human rights impacts only (e.g. in banking) and others focusing on a
broader range of issues, including impacts on the environment, health and safety, living
wage and animal welfare (e.g. in garments and textile).735
Therefore, there is diversity in the scope of these regulations on human rights and
environmental due diligence across the Member States surveyed. While the UNGPs
include all business enterprises and core international human rights law as being part of
the responsibility to undertake human rights due diligence,736 this survey shows that
across all these Member States there is a minimum scope which includes all listed
private companies of a certain size (in terms of employees or turnover), and the relevant
national and international human rights and environmental law are included within their
scope. There are, though, many examples of considerably broader scope found in
national law.
4.3.5 Transnational Application
Most laws within Member States are limited in scope and application to the territory of
the Member State. However, the Country Reports indicate that there are a range of laws
which concern due diligence which do operate transnationally (i.e. extraterritorially).
In most instances where there is transnational application, the national law requires
companies which are domiciled within their territory to report on activities which they
have undertaken outside the territory. This includes France’s Vigilance Law, The
Netherlands Child Labour Due Diligence Act and the United Kingdom’s Modern Slavery
and Bribery Acts, as well as the proposed German Legislation on Corporate Human
Rights and Environmental Due Diligence in Global Value Chains. In each instance, the
relevant law effectively includes the actions of subsidiaries, subcontractors and suppliers
which may be based outside the territory of the Member State but which are in a
business relationship with the relevant company domiciled in that Member State. This
reference to “domicile” in national regulation is drawn directly from the EU Brussels I
Recast Regulation, which is not limited to companies incorporated in the Member State,
as it includes those companies with their central administration and principal place of
business within that Member State.737
733 Government offices of Sweden, The State’s Ownership Policy and Guidelines for State-Owned Enterprises (2017) 5. 734 Spanish Law on Environmental Assessment. 735 See The Netherlands Country Report. 736 For example, Guiding Principles 11 and 12. 737 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on Jurisdiction and the
Recognition and Enforcement of Judgments in Civil and Commercial Matters.
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The Netherlands Child Labour Due Diligence Act would seem to extend this breath of
application further to include companies registered outside the jurisdiction and which
supply goods or services to Dutch end-users, even if The Netherlands is not their
principal place of business or central administration. There is a different development in
Spain. Its Law on External Action and Service of the State, requires that State
companies when operating outside Spain, should act in accordance with human rights,
and that these companies must be socially responsible, particularly in transnational
business.738
Some other national laws extend transnationally, for example, to employees of domiciled
companies who are working outside the territory.739 In addition, the Italian Law on
Administrative Responsibility of Legal Entities, Companies and Associations740 extends its
criminal corporate liability jurisdiction to crimes committed outside Italy by Italian
companies, including for specific transnational organised crimes. This extension includes
foreign subsidiaries of Italian companies if the violation occurred partly in Italy and
partly abroad.741 The German Act against Restraints of Competition enables the
competent authorities to take into account and regulate conditions for the provision of
the law outside the German domestic jurisdiction.742
There is considerable national law within the Member States surveyed which applies the
due diligence obligations in human rights and environmental matters to all companies
incorporated or registered in that Member State, as well as companies whose principal
place of business or central administration is within that Member State. This application
is what has been called “domestic measures with extraterritorial implications”,743 as it
regulates a wide range of companies operating within a Member State while having a
transnational effect. While some national law extends this transnational application,
nevertheless the laws in these Member States clearly indicate that some transnational
application of these due diligence obligations is now widely accepted in the EU.
4.3.6 Corporate Groups
A key issue in considering the use and application of human rights and environmental
due diligence is the means by which national laws determine what is the “company” for
which the due diligence obligation applies. This is within the context of the use of the
term “business enterprise” by the UNGPs to include a broad range of corporate
structures, and the term “business relationship” to cover the various types of contractual
and other links that companies have worldwide.744
It is clear from all the Member States surveyed that national law often applies to a broad
corporate group (as a business enterprise). This is evident in the implementation of the
EU Non-Financial Reporting Directive, where all Member States have applied it to the
corporate group, which extends beyond the company itself. For example, in the United
Kingdom, parent companies must prepare a consolidated strategic report for all of the
companies in the group.745
Similarly, in relation to the OECD National Contact Points, the company for which a
complaint can be made generally includes its subsidiaries. In some instances, such as in
Denmark, “business associates” are expressly included, meaning business partners,
738 Spanish Law on External Action and Service of the State. 739 See, for example, Spanish Law on Prevention of Occupational Risks, contra Danish Working Environment Act. 740 Italy’s Administrative Responsibility of Legal Entities, Companies and Associations Act. 741 Ibid at article 4. 742 Article 128, German Act against Restraints of Competition. 743 Office of the High Commissioner for Human Rights, Business and Human Rights: Further Steps towards the
Operationalisation of the ‘Protect, Respect, and Remedy Framework’, A/HRC/14/27 (2010) para 55. 744 See UNGPs, Guiding Principle 13. 745 Section 414A(3), United Kingdom Companies Act.
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entities in the supply chain, and other non-public or public entities that can be related
directly to the business activities, products or services of the company, authority
organisation.746 The United Kingdom’s Bribery Law also extends its application to
companies for the actions of “business associates”, being any person who performs
services for or on behalf of the organisation (and may include an employee, agent or
subsidiary),747 which could even include a supplier.748 Further, the specific sector
covenants in The Netherlands refer to the UNGPs and OECD Guidelines, in stating that
“enterprises bear a responsibility for preventing and reducing any adverse impact on
people and the environment by their own operation or business relationships in the
production or supply chain”.749
The French Vigilance Law includes within its coverage a company and the activities of
“companies it controls within the meaning of II of article L. 233-16, directly or indirectly,
as well as the activities of subcontractors or suppliers with whom there is an established
commercial relationship, when these activities are related to this relationship”,750 as well
as French registered subsidiaries of foreign companies. This legislation uses a threefold
definition of the concept of “control”, being legal, de facto, or contractual, as linked to
consolidated and group management reports.751 In addition, the Vigilance Law does not
refer directly to subcontractors and suppliers within the supply chain but relies on
established commercial relationships as being the key factor.752
A different approach is found in The Netherlands Child Labour Due Diligence Act, where
the scope of the obligations imposed on these companies under the Act is not limited to
certain tiers of the supply chain. Rather, as the companies involved are expected to
investigate whether there is a reasonable presumption that the goods and services to be
supplied have been produced using child labour, it means that they would have to review
their entire supply chain. As the suppliers can provide a declaration with respect to those
goods or services along the lines, this should have the effect of moving these obligations
down the supply chain. Similarly, the United Kingdom’s Modern Slavery Act expressly
references modern slavery in supply chains as being relevant to a company’s statement
published under the provision,753 and the guidance to the Act recognises that for these
purposes subsidiaries can form part of a parent company’s “own business or supply
chain”.754
This broader view of corporate group having a due diligence obligation can also be seen
in general contract law. For example, the Country Report on Belgian law notes that a
third party, such as employees of a debtor, can be given the right to enforce a
contractual provision concerning their labour conditions, and a code of conduct
concerning human rights or supply chain due diligence can be inserted across the whole
chain by a “chain clause” [kettingbeding]755 which obliges the contracting party to insert
a certain obligation in a subsequent contract, coupled with the obligation to let any
subsequent contracting party insert it as well. The enforceability of this clause can be
strengthened by adding a provision in favour of a third party, namely the first creditor,
and a damages clause. The first creditor can then enforce the obligation against any sub-
supplier who has accepted this provision.
746 Section 3, Danish Act on a Mediation and Complaints-Handling Institution for Responsible Business Conduct. 747 Section 8, United Kingdom Bribery Act. 748 United Kingdom Bribery Act Guidance, page 16: “where a supplier can properly be said to be performing services for a
commercial organisation rather than simply acting as the seller of goods, it may also be an ‘associated’ person”. 749 See The Netherlands, IRBC Agreement on Sustainable Garment and Textile, p. 8. According to the Agreement, the chain
consists of six stages: 1) production of raw materials and fibres; 2) manufacture of materials (textiles) from yarn, including
weaving, knitting, braiding, tufting, finishing and dyeing stages; 3) manufacture of components such as buttons, zips and garment trimmings; 4) manufacture of garments; 5) product design and development (often for brands); and 6) retail trade. 750 Commercial Code, article L. 225-102-4.-I as introduced by the Vigilance Law. 751 Ibid at article L. 233-16.-II. 752 See, Sherpa, Vigilance Plans Reference Guidance, Feb. 2019 at 32-33. 753 Section 54(5), United Kingdom’s Modern Slavery Act. 754 United Kingdom’s Modern Slavery Act Guidance at 23. 755 See V. Sagaert, Goederenrecht. Beginselen van Belgisch Privaatrecht, Kluwer (2014).
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In tort law, the position in the EU seems to be that there is corporate liability of parent
companies for subsidiaries in tort law across Member States, as was stated by the Polish
courts.756 This is confirmed in Dutch courts757 and by United Kingdom courts,758 which
would suggest a case might succeed against a defendant company where the company’s
supplier caused harm to the claimant, provided the claimant could establish that the
company “intervened in the management of the supplier’s activities”759 in such a way as
to assume a duty of care to the claimant. Of course, any claim under tort law across all
EU Member States requires evidence and proof of causation to be successful.
A different approach is found using vicarious liability, especially in employment law, of
the parent company for actions and omissions of its subsidiary. This is seen across a
range of Member States, such as in Belgium760 and Spain.761 Other areas of law, such as
on health and safety, have aimed to incentivise due diligence in human rights and the
environment by companies over the operations of their subsidiaries and suppliers by
extending criminal liability to entities which simply sell or supply defective or harmful
products.762
It is evident from these Country Reports that there is now a general practice across
Member States to include subsidiaries within the corporate group for which due diligence
obligations in human rights and the environment apply. In many instances, the existence
of the legal relationship between a parent company and a subsidiary is the key factor,
though evidence of particular control may be required in some laws. In addition, there is
a growing list of national laws and decisions which specifically include suppliers as part of
the company’s obligations to act with due diligence in human rights and environmental
matters.
4.3.7 Monitoring, Enforcement and Remedies
Across all Member States surveyed, there were monitoring bodies, enforcement
mechanisms and remedies available for many of the national laws related to due
diligence in human rights and environmental matters. These do, though, vary
considerably in their degree of monitoring, the effectiveness of the enforcement
mechanisms and the remedies available.
In many instances, the monitoring of the obligations is done by private actions by
individuals (as shareholders or other stakeholders) and civil society or by public actions
by regulators, with the judicial system as the final process.763 In some Member States it
is a combination of public and private enforcement of corporate due diligence obligation
which operates. For example, in Germany the Administrative Offences Act authorises
public authorities to impose fines on business owners (and even their directors) for
failure to comply with their monitoring and supervision obligations with regard to
compliance with legal duties contained in other areas of law and addressed to them in
756 Verdict of the Court of Justice (Ninth Chamber) of 20 June 2013 in Case C-186/12, and Polish Supreme Court judgment of
24 November 2009, V CSK 169/09. Note also the draft of a Polish Act on Specific Responsibility of Parent Companies for
Damages to the Dominated Company, its Partners and Creditors, where “a parent company will be obliged to repair the
damage resulting from the abuse of a dominant position unless it proves the lack of guilt”: Podmiot dominujący będzie musiał
naprawić szkodę firmie zależnej lub jej pracownikowi, Rzeczpospolita (25th April 2019), available at:
https://www.rp.pl/Firma/304259988-Spolki-matki-zaplaca-za-corki---o-projekcie-ws-odpowiedzialnosci-za-szkody-w-spolce-
kapitalowej.html. 757 See Akpan v Royal Dutch Shell PLC Arrondissementsrechtbank Den Haag, 30 January 2013 Case No C/09/337050/HA ZA 09-1580. 758 Vedanta Resources plc v Lungowe and Others [2019] UK SC 20. 759 Ibid at para 44. 760 Article 1384, third limb Belgium Civil Code. 761 See Spanish Supreme Court, judgment of 28 May 1984, Civil Division (RJ 1984/2800). 762 See Section 12(1), United Kingdom Consumer Protection Act. This is subject to the due diligence defences. 763 See, for example, Spain’s Law on Prevention of Occupational Risks and its Law on Environmental Assessment.
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their capacity as business owners,764 while the German Civil Code enables private
litigants to claim damages for violations of due diligence obligations contained in other
laws, provided these laws also aim to protect individual interests.765 Sometimes, it is the
company itself which is meant to monitor its own compliance, such as with the Danish
Financial Statements Act, which operates with a “follow-or-explain” principle.
In some national laws the obligation on companies is one of strict liability, regardless of
negligence or deliberation by a company, and there is automatic enforcement. One
example is the Finnish Act on Compensation for Environmental Damage, where there is
strict liability on companies for environmental damage towards anyone affected.766
Sometimes there is a reverse burden of proof, such as under the German Civil Code in
relation to health and safety, which creates a form of negligence liability with a reversed
burden of proof, in that a company incurs liability for damages unlawfully caused by
vicarious agents unless it can prove that it exercised due diligence in selecting,
equipping or supervising these agents; or that the damage would have occurred in spite
of exercising the required due diligence.767
Where there is a specific national law on human rights and environmental due diligence,
they tend to add some different dimensions to these issues of monitoring, enforcement
and remedies. The French Vigilance Law does not have a specific monitoring body but it
does provide for civil liability under tort law where the company breaches its own
vigilance obligations.768 The three conditions for civil liability applicable under French tort
law - and for which the claimant has the burden of proof - are the existence of damage,
a breach of or the failure to comply with the vigilance obligation, and a causal link
between the damage and the breach.769 The more remote in the supply chain that the
damage occurred, the harder it might be for the claimant to prove that the damage has
occurred as a result of a breach of the vigilance obligations, that there is causal link
between such a breach and the resulting damage, and that they are within the scope of
the vigilance obligations. If the claimant is successful, then the court can order specific
performance and compensation for actual harm. More generally, if a company has failed
to comply with its vigilance obligations, it is given a three months’ official notice to
comply – for which a non-governmental organisation and trade union can apply as it
does not need to be a claimant – and failure in complying with this notice leads to fines
on the company.770 There is no separate civil liability under the Vigilance Law for the
parent company based on the fault of other entities in their supply chains and there is no
criminal liability.771
In contrast, under The Netherlands Child Labour Due Diligence Act any natural or legal
person (such as a consumer or competitor) whose interests have been affected by the
(in)actions of a company in complying with the provisions as set out in the Act can file a
complaint with the public supervisor (who has yet to be appointed).772 If the company
does not comply with the supervisor’s order, the supervisor can impose administrative
fines of up to €8,200 for non-compliance with the duty to file a declaration, and of up to
€820,000, or up to 10% of the company’s annual turnover, for non-compliance with the
duty to conduct due diligence.773 The proposed German Legislation on Corporate Human
Rights and Environmental Due Diligence in Global Value Chains has a similar range of
fines against companies (with a minimum of €250,000), with the additional penalty of
764 Article 130 Administrative Offences Act. See also the Posted Workers Act and the Water Resources Act. 765 Article 823 II German Civil Code. 766 Section 7, Finnish Act on Compensation for Environmental Damage. 767 Article 831 German Civil Code. See also the German Labour Protection Act. 768 Commercial Code, art. 225-102-5, inserted by the Vigilance Law. 769 Articles 1240 and 1241 of the French Civil Code. 770 Commercial Code, article L. 225-102-4.-II, inserted by the Vigilance Law. 771 French Constitutional Court, Decision No 2017-750 DC, para. 27. 772 Article 1(d), The Netherlands Child Labour Due Diligence Act. 773 Ibid at article 7(1)-7(3).
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possible exclusion of the company from public procurement until such time as the
company has proved its reliability,774 the latter of which is also found in Spanish law.775
However, as the focus of The Netherlands Child Labour Due Diligence Act is on the
protection of Dutch consumers and not on the victims of child labour, it does not contain
provisions relating to access to remedy for the actual victims of child labour, so any
remedy in that regard would be dependent on general Dutch tort law. The claimants
under Dutch tort law, nevertheless, would still be able to rely indirectly on the Act if the
violation of the Act by the company could be construed as an indication of an act
contrary to a duty of care to society.776 More broadly, there have been cases before
Dutch courts for parent company liability for abuses of human rights and environmental
damage, which have been successful where it has been shown that there was the
necessary degree of control by the parent company over the subsidiary.777 There are
similar general tort provisions and case law in Italy.778 In contrast, the proposed German
Legislation on Corporate Human Rights and Environmental Due Diligence in Global Value
Chains provides more assistance for victims in that companies are obliged to waive the
statute of limitations for any claim completion of the required corporate non-judicial
grievance procedure.779
Under both The Netherlands Child Labour Due Diligence Act and the proposed German
Legislation on Corporate Human Rights and Environmental Due Diligence in Global Value
Chains, there is provision for personal criminal liability for the “compliance officer”.780 As
with money laundering legislation, companies have to appoint a compliance officer who
monitors compliance with the due diligence obligations and must be able to exercise
their tasks in a competent and independent way (such as having high level links to
management). Where the compliance officer breaches their obligations, such as by a
violation of the implementation of a due diligence process that causes serious bodily
harm, the compliance officer themselves incur personal criminal liability. This can be
punishment of a maximum of 2 years’ imprisonment and a €20,500 fine.781
In a range of other areas of national law there are specific enforcement regimes. For
example, the Italian enforcement provisions under the Italian Consumer Code do allow
for enforceability of corporate codes of conduct, on the basis that lack of compliance by
a professional with the standards set forth pursuant to their code of conduct shall be
considered as misleading advertising, if the commitment can be ascertained and
considered to be binding in accordance with the professional usages. If this condition is
met, consumers can claim that there is a lack of respect of the code of conduct or file a
collective civil action.782 This could mean that the ability to bring an action applies where
the company defines its product as ethical or as complying with human rights protection,
and human rights abuses occur down the supply chain including beyond the first tier. It
is also of note that, in a case involving ILVA, the biggest steel company in Italy, the
Italian courts recognized the right of victims to become a civil party and claim
compensation for environmental damages, and ordered the seizure of the plants blast
774 Article 16 proposed German Legislation on Corporate Human Rights and Environmental Due Diligence in Global Value
Chains. 775 Article 56, Spain’s Law on Environmental Assessment. 776 See Liesbeth Enneking, Foreign Direct Liability and Beyond – Exploring the Role of Tort Law in Promoting International
Corporate Social Responsibility and Accountability (Eleven International Publishing 2012). 777 See for example, Dutch Supreme Court, 11 September 2009, JOR 2009, 309 (Comsys). 778 See, for example, the civil proceeding by Timi (as representative of the Nigerian Ikebiri community) of human rights and
environmental claims against ENI (the Italian State-owned energy company) and NAOC (its Nigerian subsidiary) currently
pending before the Tribunal of Milan. 779 Article 9 VI, proposed German Legislation on Corporate Human Rights and Environmental Due Diligence in Global Value
Chains. 780 Article 9 The Netherlands Child Labour Due Diligence Act and Article 14 proposed German Legislation on Corporate Human
Rights and Environmental Due Diligence in Global Value Chains. 781 Article 9, The Netherlands Child Labour Due Diligence Act. 782 See A. Bonfanti, Corporate Social Responsibility and Corporate Accountability: The Italian Private International Law
Perspective (2012).
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furnaces.783 In Spain, the law on private security allows for imposition of fines,
termination of licences and a ban on directors holding directorships in the sector.784
Further, according to the Spanish Supreme Court, when an accident at workplace occurs,
the liability of the employer arises if the defendant company has not taken general or
specific prevention measures, and an effective link exists between the injury and the
action or omission.785 Under German law, a fine can be imposed on the business entity
itself if its director commits an offence that violates duties incumbent upon the company
or that leads to an unjustified enrichment of the company.786 For example, after the
Volkswagen exhaust emissions scandal in 2018, a public prosecutor imposed a fine on
the company for breach of its supervisory duties in ensuring compliance with the
German regulation implementing Framework Directive 2007/46/EC on the approval of
motor vehicles.787
Interestingly, the National Contact Points have, to a large extent, not been very active in
monitoring compliance and enabling remedies for victims in this specific area across the
Member States surveyed. There are only a few exceptions in the Member States
surveyed where there have been cases in this area which have been considered on their
merits.788
While there are a variety of monitoring means (including private and public) and
enforcement processes (through both specific legislation and general tort law) across the
Member States surveyed, there are generally remedies available for breaches by
companies of their obligations of due diligence in human rights and environmental
matters. These remedies are not always to the victims,789 as fines go to the States and
not directly to victims, and the process is not always easy for victims or stakeholders to
bring claims. Interestingly, the more recent specific laws and proposals on due diligence
include a criminal penalty for company officers if they do not comply with these laws.
4.3.8 Conclusions
It is, therefore, very clear that human rights and environmental due diligence is a
practice and process that is applied in many and diverse laws across Member States, and
is not at all unfamiliar in these national laws. While the terminology may vary, the same
aim of having a legal obligation on a company to create and apply a human rights and
environmental impact assessment to consider the risk to stakeholders is found in these
Member States. Hence, a use of the term “due diligence” in relation to human rights and
the environment in any EU legislation would not appear to be a problem for
harmonisation within the Member States surveyed.
The detailed examination here of the laws on due diligence for human rights and
environmental issues of 12 Member States with a diversity of legal systems and
approaches also indicates that there are legal obligations on companies in this area.
These laws generally extend to all listed private companies of a certain size (in terms of
employees or turnover), and normally for all relevant national and international human
rights and environmental law. There are also many examples of considerably broader
scope found in national law, including application to the public sector. In addition, there
are a considerable number of national laws which apply the due diligence obligations to
783 See HRIC et al, The Environmental Disaster and Human Rights violations of the ILVA steel plant in Italy (2018). 784 Spanish Law on Private Security. 785 See Spanish Supreme Court, STS de 2 de octubre de 2000; STS 26 de marzo de 1999. 786 Article 130, 30 German Administrative Offences Act. 787 See https://freeamericanetwork.com/vw-fined-one-billion-euros-by-german-prosecutors-over-emissions-cheating. 788 See Danish National Contact Point for the OECD, Specific instance on the Danish NCP’s own instigation: The due diligence
process of the Danish Ministry of Defence in regard to the contracting and building of the inspection vessel Lauge Koch
statement (September 6, 2018) and the German National Contact Point:
https://www.bmwi.de/Redaktion/EN/Textsammlungen/Foreign-Trade/national-contact-point-ncp.html. 789 See UNGPs, Commentary to Guiding Principle 25.
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all companies domiciled in that State (being based on EU law in this regard) and, in
some instances, to other companies.
Further, there is usually an extension of the obligations to subsidiaries of companies,
wherever they are domiciled, and an increasing number of laws which specifically include
suppliers as part of the company’s obligations to act with due diligence in human rights
and environmental matters. The independent review in Ireland of its provision in this
area, summarises this development:790
[H]uman rights due diligence ought to be considered as a minimum requirement
for State companies, businesses that obtain government contracts through the
public procurement process, businesses that Ireland engages with through its
embassies and State agencies and bodies that derive State support and that act
outside the jurisdiction. Human rights due diligence should include reporting on
human rights practices outside the jurisdiction so that companies that provide
human rights reporting in Ireland, whether due to being domiciled in Ireland, or
otherwise, must also report on the human rights of their out of territory
operations.
This is a useful summary of the reasons for having mandatory human rights and
environmental due diligence, and including within it requirements in public procurement
and export credit. In addition, there are some form of enforcement measures and
remedies available in most Member States for breaches of these obligations.
The developments in mandatory due diligence for human rights and environmental
impacts on companies in the EU can be seen in the recent specific laws on due diligence
in human rights and environmental matters in France, The Netherlands, and the United
Kingdom. There are also proposed laws, which have been drafted in full in Germany, or
not yet fully formulated in Belgium,791 Denmark, 792 and Finland.793 These show an
increasing expectation of human rights and environmental due diligence obligations on
companies in the EU. In addition, many of these laws and proposed laws have support
from companies, as they wish to have legal certainty,794 which any EU wide regulation
would enhance.
790 ReganStein et al, National Plan on Business and Human Rights; Baseline Assessment of Legislative and Regulatory
Framework, March 2019, p. 20 available at: https://www.dfa.ie/media/dfa/ourrolepolicies/humanrights/Baseline-Study-
Business-and-Human-Rights-v2.pdf at p.22. 791 See https://bit.ly/2YgzpkX. 792 See Fremsat den 24. januar 2019 af Rasmus Nordqvist (ALT), Eva Flyvholm (EL) og Lisbeth Bech Poulsen (SF) Forslag til
folketingsbeslutning om at gøre det lovpligtigt for virksomheder at udøve nødvendig omhu på menneskerettighedsområdet og
om indførelse af effektive retsmidler, Beslutningsforslag nr. B 82 (January 24, 2019). 793 See Ykkösketjuun official website https://ykkosketjuun.fi/en/. 794 See Robert McCorquodale, Lise Smit, Stuart Neely and Robin Brooks “Human Rights Due Diligence in Law and Practice:
Good Practices and Challenges of Business Enterprises” (2017) 2 Business and Human Rights Journal 195.
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IV. PROBLEM ANALYSIS AND OPTIONS FOR REGULATORY
INTERVENTION
1. Introduction
This section sets out the problem analysis, policy background and intervention logic, and
develops a set of regulatory options in accordance with Task 3 of the TOR. The
framework used is that of the EU Better Regulation guidelines and toolbox.795
2. Problem analysis
This section defines the relevant problems and their drivers.
2.1 Adverse human rights and environmental impacts in global
value chains, aggravated by their increasingly complex, dynamic
and non-transparent character
Human rights and environmental harms related to business operations are well-
documented both within and outside of the EU.796 This situation is aggravated as a result
of globalisation, which has led to increasingly complex, dynamic and non-transparent
global supply and value chains.797
Adverse impacts can take place within all sectors, and have impacts on all human rights
and the environment. The following examples, some of which are considered to be
common or even widespread, demonstrate the wide range of human rights and
environmental impacts allegedly caused or contributed to by or linked to the operations
of businesses (including European companies) that have been documented by civil
society, international organisations, courts, scientists and other sources:798
Global temperatures and extreme weather conditions are increasing,799 leading
to calls by the United Nations for the international community, states and
businesses to take action together.800
The size of the EU’s environmental footprint,801 insofar as “Europe is currently
living on emission and resource credits provided by other parts of the world”.802
The contribution to climate change through particularly high greenhouse gases
emitted by companies in the energy sector.803 In particular, it has been shown
795Available at: https://ec.europa.eu/info/law/law-making-process/planning-and-proposing-law/better-regulation-why-and-
how/better-regulation-guidelines-and-toolbox_en. 796 See for example the extensive resources collected by the Business and Human Rights Resource Centre, available at:
www.business-humanrights.org. 797 Horatia Muir-Watt, ”Private International Law Beyond the Schism” (2011) 2 Transnational Legal Theory 347. 798 These examples were selected as a sample, and are not exhaustive of the types of impacts that can occur due to business
operation. While the examples focus on adverse impacts of EU companies, similar problems have been documented for the
globalised supply and value chains of non-EU companies. 799 World Meteorological Organization, “WMO Statement on the State of the Global Climate in 2018” (March 2019), available
at: https://gallery.mailchimp.com/daf3c1527c528609c379f3c08/files/82234023-0318-408a-9905-
5f84bbb04eee/Climate_Statement_2018.pdf. 800 “New UN Global Climate report ‘another strong wake-up call’ over global warming: Guterres”, UN News (28 March 2019),
available at: https://news.un.org/en/story/2019/03/1035681. 801 Joanne Scott, “Reducing the EU's Environmental Footprint Through 'Territorial Extension'” in V. Mauerhofer, D. Rupino & L. Tarquinio (eds.), Sustainability and Law (forthcoming, Springer, 2019). 802 Arnold Tukker, Tanya Bulavskaya, Stefan Giljum, Arjan de Koning, Stephan Lutter, Moana Simas, Konstantin Stadler,
Richard Wood “Environmental and resource footprints in global context: Europe’s structural deficit in resource endowments”
(2016) 40 Global Environmental Change 171 at 179. 803 For instance, German company RWE, was accused of contributing to climate change, as one of the world's top
emitters of greenhouse gases, and asked by a Peruvian farmer in 2015 to contribute its share (proportional to its historic CO2
emissions) to the cost of protecting his house and the village of Huaraz from the risk of flooding due to the melting of two
215
that 100 major companies are responsible for over 70% of greenhouse gas
emissions.804
Deforestation in global supply chains, and large-scale imports of deforestation
goods into the EU.805
The decline of ecosystems and biodiversity which is accelerating at
unprecedented rates, and has been recognised by the UN Environment as posing
risks for “economies, livelihoods, food security, health and quality of life
worldwide”.806
Low wages not satisfying the basic needs of workers and their families in the
garment sector.807
Pollution of the environment resulting in the loss of livelihoods and health for
local communities as the result of the activities of the subsidiaries of
multinational companies,808 or the disposal of industrial waste in developing
countries without adequate treatment by subcontractors of multinational
companies in the mining and energy sectors.809
Fatalities and injuries suffered as a result of unsafe working conditions in
factories in the garment sector supply chain.810
glaciers into a lake. On this case, see BHRRC, “RWE lawsuit (re climate change)”, available at: https://www.business-
humanrights.org/en/rwe-lawsuit-re-climate-change. 804 BHRRC, “Turning up the Heat: Corporate Legal Accountability for Climate Change", Corporate Legal Accountability
Annual Briefing 2018, available at: https://www.business-humanrights.org/sites/default/files/CLA_AB_2018_Full.pdf at 5. See
also Bryan Cave Leighton Paisner “Addressing Climate Change in Due Diligence for Corporate Transactions” (9 January 2019),
available at: https://www.jdsupra.com/legalnews/addressing-climate-change-in-due-93555/. 805 Fern, ”Stolen Goods: The EU’s Complicity in Illegal Tropical Deforestation”, (March 2015), available at:
https://www.fern.org/fileadmin/uploads/fern/Documents/Stolen%20Goods_EN_0.pdf. 806 Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), “Nature’s Dangerous Decline ‘Unprecedented’ Species Extinction Rates ‘Accelerating’”, Press Release (6 May 2019), available on UN Environment
website at: https://www.unenvironment.org/news-and-stories/press-release/natures-dangerous-decline-unprecedented-
species-extinction-rates. 807 Fair Wear Foundation, “Using Due Diligence in Labour Costing to Meet Wage Compliance” (2018), available at:
https://api.fairwear.org/wp-content/uploads/2018/11/FWF-Due_Diligence-paper-2018-DEF-digital.pdf. 808 Examples include the oil spills arising out of the activities of the Nigerian subsidiary of Anglo-Dutch company Shell in
the Niger Delta which reportedly affected the health and livelihood of the communities living in the surrounding areas. On this
case see Amnesty International “Negligence in the Niger Delta: Decoding Shell and Eni's Poor Record on Oil Spills” (2018),
available at: https://www.amnesty.org/download/Documents/AFR4479702018ENGLISH.PDF. Another example can be provided by English company BP which was accused of causing environmental damage to the land of Colombian farmers (including
cutting across key water sources which caused soil erosion and spoiled crops and fish ponds) as a result of the construction of
an oil pipeline by a consortium led by BP. On this case, see BHRRC, “BP lawsuit (re Colombia)”, available at:
https://www.business-humanrights.org/en/bp-lawsuit-re-colombia?page=1. 809 For example, in August and September 2006, the English company Trafigura Ltd. (subsidiary of the Dutch company
Trafigura Beheer BV) arranged for the offloading of industrial waste from the Probo Koala ship that it had chartered and the
disposal of such waste in Côte d'Ivoire by a local contractor through its Ivorian subsidiary. The waste was disposed of without
appropriate treatment by the latter in various sites around the city following which over 100,000 residents were reported to
have sought medical assistance. On this case, see Okechuku Ibeanu, “Report of the Special Rapporteur on the adverse effects
of the movement and dumping of toxic and dangerous products and wastes on the enjoyment of human rights , Mission to Côte d'Ivoire (4 to 8 August 2008) and the Netherlands (26 to 28 November 2008)”, A/HRC/12/26/Add.2 (3 September 2009),
available at: https://www2.ohchr.org/english/bodies/hrcouncil/docs/12session/A-HRC-12-26-Add2.pdf. Another example
concerns the Swedish mining company Boliden which exported industrial waste (smelter sludge) to Chile where it was disposed
of by a subcontractor of the company without being adequately processed, allegedly causing local communities to suffer from
health issues as well as adverse environmental impacts. On this case, see BHRRC, “Boliden lawsuit (re Chile)”, available at:
https://www.business-humanrights.org/en/boliden-lawsuit-re-chile. 810 For example, the collapse of the Rana Plaza Building in Bangladesh on 24 April 2013 caused the deaths of 1,138 workers
and left more than 2,500 others injured. The eight-story building notably housed garment factories. European brands that
were sourcing from these garment factories included Primark (UK/Ireland), Mango (Spain), Carrefour (France), Benetton (Italy), El Corte Ingles (Spain), Bon Marche (UK), Kik (Germany) and Matalan (UK). Large structural cracks had been
discovered in the building the day before the collapse and prompted an evacuation. However, garment workers were ordered
to return to work the following day when the building collapsed. On this case, see Clean Clothes Campaign, “Rana Plaza: a
man-made disaster that shook the world”, available at: https://asia.floorwage.org/ua/2013/rana-plaza. Just a few months
earlier, on 11 September 2012, a fire erupted in the Ali Enterprises textile factory in Pakistan causing the death of 258 workers
and leaving dozens more injured. German clothing retailer KiK was the factory's main customer. KiK had established its own
Supplier Code of Conduct requiring its worldwide suppliers to comply with certain standards. In addition, a few weeks before
the fire, the factory had been awarded the SA8000 certification (meant to ensure compliance with global standards, notably
with regard to health and safety) by Italian auditing company RINA who itself subcontracted the inspection to a Pakistani
company. However, a computer simulation of the fire textile factory put together by Forensic Architecture at Goldsmiths (University of London) at the request of the ECCHR showed that inadequate fire safety measures, such as the lack of stairs,
emergency exits, fire extinguishers and fire alarms in the factory, contributed to the death and injury of hundreds of factory
workers. The simulation demonstrated that minor improvements to the safety measures in place - in particular, accessible
stairways and clearly signposted escape routes - would have significantly altered the progression of the fire and spared many
lives. LG Dortmund, Urteil vom 10.01.2019 - 7 O 95/15, available at: https://openjur.de/u/2155292.html (first instance); OLG
Hamm, Beschluss vom 21.05.2019 - 9 U 44/19, available at: https://openjur.de/u/2174526.html (second instance). On this
case, see ECCHR, ”Kik: Paying the price for clothing production in South Asia”, available at: https://www.ecchr.eu/en/case/kik-
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The removal of indigenous communities from their land without free, prior and
informed consent for the purposes of projects financed by multinational
investors.811
Torture, killings of individuals812 by security services enlisted by companies to
assist the resolution of a dispute surrounding the business activities in particular
in the forestry and mining sectors.
Torture and killing of human rights defenders,813 “in 2017 [...] 201 land and
environmental defenders were killed and many more were attacked, threatened
or criminalised for speaking out for their communities, their way of life and the
environment. [...] Forty defenders were killed protesting against agribusiness
companies, including for palm oil, coffee, tropical fruit, sugar cane and cattle
ranching”.814`
Attempts at silencing human rights defenders through Strategic Lawsuits Against
Public Participation (SLAPPs). For instance, the Business and Human Rights
Resource Centre found that 12 carbon majors brought at least 24 lawsuits
against 71 environmental and human rights defenders between 2015 and 2015,
for a total of US$ 904 million in damages.815
Unlawful detentions and killings of individuals after their private information was
obtained from telecommunications companies, or through the surveillance
equipment provided by them.816
Hate crimes and genocide encouraged by hate speech and harmful online
content on the platforms of private internet companies.817
paying-the-price-for-clothing-production-in-south-asia/. Other similar incidents include the textile factory fire in the Tazreen factory in Bangladesh on 24 November 2012 which caused the death of 112 workers who were producing clothes notably for
European brands such as El Corte Ingles (Spain), C&A (Belgium/Germany) and KiK (Germany). On this case, see Clean Clothes
Campaign, “Six years after deadly garment factory fire, Bangladesh risks new wave of factory incidents”, available at:
https://cleanclothes.org/news/2018/11/24/tazreen-fashions-6-years. 811 On these issues, see Yorck Diergarten, “Indigenous or Out of Scope? Large-scale Land Acquisitions in Developing Countries,
International Human Rights Law and the Current Deficiencies in Land Rights Protection” (2019) 19:1 Human Rights Law
Review 37. 812 For instance, German-owned logging business Danzer allegedly aided and abetted gross human rights violations carried out
by the police and military forces (through providing financial and logistical assistance) against a forest community in the Democratic Republic of the Congo on 2 May 2011, which included sustained beatings of the villagers, rape, arbitrary arrest and
destruction of property. On this case, see Greenpeace, “Stolen future: Conflicts and logging in Congo's rainforests - the case of
Danzer”, available at: https://www.greenpeace.org/archive-
international/Global/international/publications/forests/2011/stolen%20future.pdf. Other examples include the English company
African Minerals accused of complicity in human rights abuses carried out by the police forces in Sierra Leone to quell villagers’
protests against the company's mining operations in 2010 and 2012, which included assault, false imprisonment, rape and
murder. On this case, see BHRRC, “Tonkolili Iron Ore lawsuit (re complicity in violence against villagers in Sierra Leone)”,
available at: https://www.business-humanrights.org/en/tonkolili-iron-ore-lawsuit-re-complicity-in-violence-against-villagers-
in-sierra-leone. In 2008, Tanzanian villagers were killed and injured by police and security forces at the North Mara Mine
owned by the Tanzanian subsidiary of the English company Acacia Mining (formerly African Barrick Gold). Both companies were accused of being complicit in the human rights abuses and failing to prevent the use of excessive force by the security and
police forces at the mine. On this case, see BHHRC, “African Barrick Gold lawsuit (re Tanzania)”, available at:
https://www.business-humanrights.org/en/african-barrick-gold-lawsuit-re-tanzania. In May 2012, a number of Peruvian
citizens were severely injured and two persons were killed by the Peruvian National Police (PNP) in the course of an
environmental protest at the Tintaya copper mine then owned by the Peruvian subsidiary of the English company Xstrata, both
of which allegedly provided logistical assistance to PNP. On this case, see BHRRC, “UK High Court to hear claim over Glencore's
liability for alleged killings and injuries of protestors at Tintaya mine”, available at: https://www.business-
humanrights.org/en/uk-high-court-to-hear-claim-over-glencore’s-liability-for-alleged-killings-injuries-of-protestors-by-
peruvian-police-at-tintaya-copper-mine#c164399. 813 This is increasingly such a widespread issue that the Business and Human Rights Resource Centre has an entire portal
dedicated to track and document examples of attacks on human rights defenders in the context of business activity:
https://www.business-humanrights.org/en/bizhrds. To date, last visited 27 October 2019, the number of attacks tracked in the
portal stand at 1983. The portal further indicates that “[o]ver 1400 attacks on defenders working on businesses-related human
rights abuses took place from 2015-2018”. 814 ClientEarth and Global Witness, ”Strengthening Corporate Responsibility: The case for mandatory due diligence in the EU to
protect people and the planet” (July 2019), available at: https://www.globalwitness.org/en/campaigns/forests/strengthening-
corporate-responsibility/. 815 BHRRC, “Silencing the Critics: How big polluters try to paralyse environmental and human rights advocacy through the
courts”, (30 September 2019), available at: https://www.business-humanrights.org/en/silencing-the-critics-how-big-polluters-try-to-paralyse-environmental-and-human-rights-advocacy-through-the-courts. 816 For instance, French company Amesys allegedly provided surveillance equipment to the Gaddafi regime in Libya which was
used to intercept private internet communications, and to identify dissidents who were then arrested and tortured. On this
case, see FIDH, “The Amesys Case”, available at: https://www.fidh.org/IMG/pdf/report_amesys_case_eng.pdf. Another
example involves the French company Qosmos which allegedly provided surveillance equipment to the Bashar Al Assad
government in Syria used to identify, arrest and torture dissidents. On this case, see BHRRC, “Qosmos investigation (re
Syria)”, available at: https://www.business-humanrights.org/en/qosmos-investigation-re-syria.
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Modern slavery, forced labour and human trafficking in the supply chains of
consumers goods that are sold at European supermarkets.818
Exploitation of migrant workers in construction sites operated by the subsidiaries
of multinational companies.819
Genocide, war crimes and crimes against humanity by governments or terrorist
enterprises financed by multinational companies or investors.820
Widespread use of child labour in cocoa farms in Côte d'Ivoire and Ghana to
produce goods, including chocolate, for the European market.821
Torture, violence, rape and killings of individuals in conflict zones fuelled by
sourcing of certain minerals by multinational companies to make products
including laptops, mobile phones and cars sold on the European market.822
These examples, which do not constitute an exhaustive list, arise both in companies’
own operations and within their global value chains. Supply chains of transnational
companies often have tens of thousands of suppliers across multiple tiers. Companies
often only have direct contractual relationships with first tier suppliers, and very limited
or no visibility of the supply chain beyond that. First tier suppliers are often protective of
information with respect to their further supply chain.823 Leverage over suppliers differs
vastly depending on the size of the company, the size of the suppliers, and the nature of
the relationship.824
817 Examples of this include the role of the Internet and social media platforms having enabled the spread of hateful and
divisive rhetoric in Myanmar, see UN Human Rights Council, “Report on the detailed findings of the Independent International Fact-Finding Mission on Myanmar”, A/HRC/39/CRP.2 (17 September 2018). 818 A 2017 BHRRC report noted that modern slavery is prevalent “in almost every global supply chain”. BHRRC, “Modern
Slavery in Company Operation and Supply Chains: Mandatory transparency, mandatory due diligence and public procurement
due diligence” (September 2017), available at: https://www.business-
humanrights.org/sites/default/files/documents/Modern%2520slavery%2520in%2520company%2520operation%2520and%252
0supply%2520chain_FINAL.pdf at 2. Examples include the forced labour, human trafficking and other serious gross rights
abuses of migrant workers (including children) on the Thai fishing boats producing fishmeal that feeds farmed prawns which
are notably purchased by European supermarkets such as Tesco (UK), and Carrefour (France). On this case, see Human Rights
Watch, “Hidden Chains: Rights Abuses and Forced Labor in Thailand's Fishing Industry” (23 January 2018), available at: https://www.hrw.org/report/2018/01/23/hidden-chains/rights-abuses-and-forced-labor-thailands-fishing-industry#_ftn2.
Other examples within the EU include the severe labour exploitation (including living and working conditions incompatible with
human dignity, working long shifts, and being deprived of sleep and toilet breaks) of Lithuanian workers who were allegedly
trafficked to the UK in 2008 to work on chicken farms producing eggs purchased by English supermarkets. On this case, see
BHRRC, “DJ Houghton lawsuit (re trafficked Lithuanian migrants)”, available at: https://www.business-humanrights.org/en/dj-
houghton-lawsuit-re-trafficked-lithuanian-migrants. 819 For instance, Irish company Mercury MENA and French company Vinci allegedly violated the human rights of migrant
workers involved in their construction sites for the 2022 football World Cup in Qatar. Alleged violations include forced labour,
enslavement, reckless endangerment of workers' lives and working conditions incompatible with human dignity. On this case,
see Amnesty International, “Unpaid and abandoned: the abuse of Mercury MENA workers” (2018), available at: https://www.amnesty.org/en/latest/research/2018/09/mercury-mena-abuses-qatar/. See also BHRRC, “Vinci lawsuits (re
forced labour in Qatar)”, available at: https://www.business-humanrights.org/en/vinci-lawsuit-re-forced-labour-in-qatar. 820 For example, in 1994, French bank BNP Paribas allowed a financial transaction which allegedly participated to
financing the purchase of 80 tons of weapons by the Rwandan government which were used to kill over 800,000 people
(mostly of the Tutsi minority) during the Rwandan genocide. On this case, see BHRRC, “NGOs file lawsuit in France against
BNP Paribas over alleged complicity in genocide in Rwanda”, available at: https://www.business-humanrights.org/en/ngos-file-
lawsuit-in-france-against-bnp-paribas-over-alleged-complicity-in-genocide-in-rwanda. More recently, 11 former Syrian
employees of French company Lafarge and two NGOs filed a criminal complaint against the company for complicity in war
crimes and crimes against humanity, deliberate endangerment of people's lives, working conditions incompatible with human dignity, and exploitative and forced labour. Lafarge and its Syrian subsidiary allegedly bought raw material from diverse
jihadist groups (including ISIS) and negotiated safe passage for its workers and products in exchange for financial
compensations which amounted to approximately 13 million euros. On this case, see BHRRC, “Lafarge lawsuit (re complicity in
crimes against humanity in Syria)”, available at: https://www.business-humanrights.org/en/lafarge-lawsuit-re-complicity-in-
crimes-against-humanity-in-syria. 821 According to Unicef, “the number of children in hazardous work in cocoa production continues to be a concern”
despite the efforts that have been made over the past few years: https://www.unicef.org/csr/cocoa.html. 822 See for instance SOMO, “Multinational corporations in conflict-affected areas: Risks and challenges around human rights
and conflict” (December 2015), available at: https://www.somo.nl/wp-content/uploads/2016/01/Risks-and-challenges-around-
human-rights-and-conflict.pdf. See also John Prendergast, “Can you hear Congo now? Cell Phones, Conflict Minerals and the Worst Sexual Violence in the World” (April 2009), available at:
https://enoughproject.org/files/Can%20Your%20Hear%20Congo%20Now.pdf. 823 Robert McCorquodale, Lise Smit, Stuard Neely and Robin Brooks, “Human Rights Due Diligence in Law and Practice: Good
Practices and Challenges for Business Enterprises” (2017) 2:2 Business and Human Rights Journal 195 at 222. 824 The Commentary to UNGP 19 provides that: “Where the relationship is ’crucial‘ to the enterprise, ending it raises further
challenges. A relationship could be deemed as crucial if it provides a product or service that is essential to the enterprise’s
business, and for which no reasonable alternative source exists”.
218
Contractual provisions and supply chain codes of conduct remain one of the most
frequently used tools for implementing supply chain due diligence,825 but enforcement of
contractual obligations on suppliers’ due diligence are problematic,826 and in any event
only available where there is a direct contractual relationship, such as with first tier
suppliers.
The UN Working Group on the issue of human rights and transnational corporations and
other business enterprises notes, in this respect:827
An apparent gap in current supply chain management is that human rights due
diligence tends to be limited to tier-one companies. Efforts to go beyond tier one
tend to happen only when the issue has been brought to light by the media or
non-governmental organisations (NGOs). Few companies appear to be asking
tier-one suppliers to demonstrate that they — and their suppliers in the tiers
below — fulfil the responsibility to respect human rights by requiring assessments
of the risks to and impacts on human rights.
Traceability of entities and activities in the supply chain is a commonly cited issue,
although, increasingly, some companies demonstrate that they have taken steps to
increase traceability and map the supply chain. Steps have also been taken to develop
human rights audits, using a human rights lens and human rights experts as auditors.
However, it is widely acknowledged828 that audits are limited. In addition, as
demonstrated by our survey, very limited practices are currently being utilised for
downstream due diligence.
Close cooperation and deep engagement with suppliers are required to ensure
meaningful improvement in practices. Other solutions to the supply chain visibility issue
can be found in the reduction of complexity of supply chains and exploration of
technology such as blockchain.
2.2 Lack of implementation of due diligence by companies, despite existing
voluntary and legally binding transparency and reporting requirements
Since the adoption of the UNGPs, various legislative developments and voluntary
standards at international, regional, domestic and industry level have introduced due
diligence transparency and reporting requirements.829 These standards are often
accompanied by detailed guidance.
However, research has shown that implementation levels of supply chain due diligence
requirements are low, despite the increasing presence of transparency and reporting
requirements.830 According to the available data, only a small number of companies take
825 Ibid at 215. 826 Cases like the KiK case have illustrated the limitations of this sort of contractual obligation. Indeed, in spite of the Supplier
Code of Conduct established by KiK and requiring its suppliers worldwide to comply with certain standards, including health and safety standards, actual compliance with such standards remained problematic in practice, and inadequate fire safety
measures reportedly contributed to the death and injury of many factory workers in the fire that erupted in the textile factory
of KiK's supplier in Pakistan. On this case, see Axel Marx, Claire Bright and Jan Wouters, “Access to Legal Remedies for Victims
of Corporate Human Rights Abuses in Third Countries” (February 2019), available at:
http://www.europarl.europa.eu/RegData/etudes/STUD/2019/603475/EXPO_STU(2019)603475_EN.pdf at 59. 827 UN Working Group on the issue of human rights and transnational corporations and other business enterprises, A/73/163
(16 July 2018) at para 29. 828 Marx, Bright and Wouters, above n 826 at 66, which highlights that KiK's textile factory had been audited in order to
receive the SA8000 certification which was awarded just three weeks before the fire and in spite of inadequate fire safety
measures. Studies have confirmed the limitations of audits. See also Genevieve LeBaron and Jane Lister, ”Ethical Audits and the Supply Chains of Global Corporations”, Sheffield Political Economy Research Institute Global Political Economy Brief No. 1
(January 2016), available at: http://speri.dept.shef.ac.uk/wp-content/uploads/2018/11/Global-Brief-1-Ethical-Audits-and-the-
Supply-Chains-of-Global-Corporations.pdf. These limitations have been confirmed by interviewees in this study. 829 For details, see Section 3 Regulatory Review. 830 For example, see Alliance for Corporate Transparency, "2018 Research Report: The State of Corporate Sustainability
Disclosure under the EU Non-Financial Reporting Directive", available at:
http://www.allianceforcorporatetransparency.org/assets/2018_Research_Report_Alliance_Corporate_Transparency-
219
any steps to implement such due diligence. In cases where companies do take some
steps, their due diligence processes often fall short of the standards expected.831
In a report on the implementation of human rights due diligence the UN Working Group
on the issue of human rights and transnational corporations and other business
enterprises noted that:832
According to human rights benchmarking and rating assessments, the majority of
companies covered by the assessments do not demonstrate practices that meet
the requirements set by the Guiding Principles. This may indicate that risks to
workers and communities are not being managed adequately in spite of growing
awareness and commitments. One of the indicators is the lack of focus on human
rights risks in most current reporting, which is at best a result of inadequate
communication or at worst a reflection of insufficient understanding and
management of risks to human rights. In general, there is much room for
improvement regarding transparency on the concrete details of risk assessments
and human rights due diligence processes. Often human rights due diligence is
not understood properly, resulting in:
(a) Misconstruction of risk, namely, when companies operate with a mindset of
risk to the business and not risk to rights holders, such as workers, communities
and consumers. Related to that, there is a lack of understanding on how better
human rights due diligence will also improve the overall risk management
approach. Reluctance or even pushback from traditionally oriented legal counsel,
both in-house and external, fearing disclosure is a key obstacle to uptake by companies;
(b) Failure to address the most significant risks to human rights first and focusing
instead on risks that may be relatively easy to address or that are getting
attention in a given context, such as modern slavery or diversity, rather than
doing an objective assessment of the most significant and likely risks to people affected by the activities and business relationships of the enterprise;
(c) Too many human rights impact assessments done as exercises to tick the
box, without meaningful engagement with stakeholders, including engagement
with vulnerable or at-risk groups and critical voices such as human rights defenders;
(d) Most business enterprises still being mostly reactive, instead of proactively
trying to identify potential human rights impacts before they arise, including
through early-stage meaningful engagement with potentially affected stakeholders.
66d0af6a05f153119e7cffe6df2f11b094affe9aaf4b13ae14db04e395c54a84.pdf. See discussion below, section 5.3. See also
Genevieve LeBaron and Andreas Rühmkorf, “Steering CSR Through Home State Regulation: A Comparison of the Impact of the
UK Bribery Act and Modern Slavery Act on Global Supply Chain Governance” (2017) 8:3 Global Policy 15; Karin Bhuman,
“Neglecting the Proactive Aspect of Human Rights Due Diligence? A Critical Appraisal of the EU's Non-Financial Reporting
Directive as a Pillar One Avenue for Promoting Pillar Two Action” (2018) 3:1 Business and Human Rights Journal 23. See also
PwC, "Strategies for Responsible Business Conduct", Report prepared at the request of the Ministry of Foreign Affairs of the
Netherlands (December 2018), available at: https://zoek.officielebekendmakingen.nl/blg-874902.pdf at 59; Business & Human
Rights Resource Centre, "FTSE 100 & the UK Modern Slavery Act: From Disclosure to Action", available at:
https://www.business-humanrights.org/sites/default/files/FTSE%20100%20Briefing%202018.pdf; Frank Field, Maria Miller and Baroness Butler-Sloss, “Independent Review of the Modern Slavery Act, Second interim report: Transparency in supply
chains”, available at:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/796500/FINAL_Independe
nt_MSA_Review_Interim_Report_2_-_TISC.pdf. 831 Ibid. 832 UN Working Group on the issue of human rights and transnational corporations and other business enterprises, above n827
at para 25.
220
The drivers of this low implementation are commonly perceived to be a lack of
monitoring and enforcement of the requirements, as well as a failure of current
corporate risk assessment processes to extend beyond the materiality of the risks to the
company to the severity of the risks to those who are affected by the adverse impacts
(see next sub-section). Moreover, existing requirements mainly require reporting, which
is only one of the components of due diligence.833
Due diligence is defined as a process which includes four broad components:834
1. Identifying and assessing actual and potential impacts
2. Integrating and acting upon the findings
3. Tracking the effectiveness of these actions, and
4. Communicating how impacts are addressed, including through reporting.
Regulatory reporting requirements can be legally complied with by simply reporting,
without taking any of the other steps of due diligence. As such, reporting requirements
do not require substantive due diligence as part of the legal requirement. Very few
reporting requirements to date have been accompanied by enforcement provisions for
failing to report in accordance with the requirement. Moreover, existing examples of
reporting requirements have also not been accompanied by enforcement mechanisms for
failure to implement adequate due diligence processes. A recent report prepared at the
request of the Dutch Ministry of Foreign Affairs pointed out that these types of reporting
requirements rely on the underlying assumption according to which there is no explicit
need to push for enforcement as “businesses would be eager to comply due to the
pressure they face from civil society, consumers and investors”.835 Another scholar
explains that “the reasoning implies that the risk of the possibility of firms being
challenged by civil society groups, investors, consumers and stakeholders for their
business practices will drive change proactively to avoid reputational damage and
reactions by stakeholders like investors or consumers that may have economic impacts
on the firm”.836 However, in practice, widespread issues of corporate non-compliance
have made this assumption seem questionable.837 In addition, it has been noted that:838
[W]hen reporting is undertaken with a compliance perspective, the likely result is
a report offering a picture that corresponds to stakeholders' ideal image of the
firm without generating learning for the organization, nor necessarily sharing
information that critical social actors need in order to hold firms to account for
their impacts, policies, and reported information.
As a result, many studies have highlighted the lack of concrete impact of these types of
regulatory measures,839 and the fact that they have not delivered in terms of driving
actual change in corporate behaviour in practice.840
Moreover, the lack of due diligence within companies’ own operations and supply chains
is frequently a result of internal incoherence within companies, particularly around
833 Chiara Macchi and Claire Bright, “Hardening Soft Law: The Implementation of Human Rights Due Diligence Requirements in
Domestic Legislation” in M. Buscemi, N. Lazzerini and L. Magi, Legal Sources in Business and Human Rights - Evolving
Dynamics in International and European Law (forthcoming, Brill, 2019). 834 UNGP 17. 835 PwC, above n 830 at 37. 836 Bhumann, above n 830 at 28. 837 NYU Stern Center for Business and Human Rights, “Research Brief: Assessing Legislation on Human Rights in Supply
Chains: Varied Designs but Limited Compliance” (19 June 2019), available at:
https://bhr.stern.nyu.edu/blogs/2019/6/19/research-brief-assessing-legislation-on-human-rights-in-supply-chains at 4. 838 Bhumann, above n 830 at 37. 839 See for instance, Frank Field, Maria Miller and Baroness Butler-Sloss, ”Independent Review of the Modern Slavery Act 2015
- Final Report” (2019), available at:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/803406/Independent_revi
ew_of_the_Modern_Slavery_Act_-_final_report.pdf. 840 Sandra Cossart, Jérôme Chaplier and Tiphaine Beau de Loménie, “The French Law on Duty of Care: a Historic Step Towards
Making Globalization Work for All” (2017) 2:2 Business and Human Rights Journal 317 at 319.
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buying practices. Even where contractual clauses or supply codes of conduct require
human rights and environmental standards, the prices paid to suppliers may not take
into account the costs of adhering to these human rights or environmental standards.841
Often, prices are so low that they do not allow suppliers to pay their workers the local
minimum wage842 or social welfare payments, and delivery times lead to unreasonable
working hours. Where the company’s due diligence takes place through human rights
training and audits, suppliers are often required to pay for such training and audits, with
no corresponding increase in the purchase price.843 For example, Oxfam's 2019
“Supermarket Scorecard” analysing 16 EU and US supermarkets' policies and practices
on human rights in their supply chains, identified “unfair trading practices” as one area
of priority for action.844 The report notes that:845
Supermarkets use a range of practices that pressure suppliers - squeezing their
ability to pay workers a living wage. Low-price policies in particular contribute to the
exploitation of workers. This undermines any good efforts companies place in other
areas. Only three supermarkets have committed to eliminate these practices, but no
meaningful actions have been disclosed.
2.3 Failure of corporate risk assessment processes to extend beyond the
risks of the company to those who are actually or potentially affected by
its supply and value chain
Current corporate risk assessment processes are not focused on risks to those who are
actually or potentially affected by its operations, supply chain or value chain. In many
cases, affected persons (or “rights-holders”)846 are external parties with no relationships
to the company.
Traditional reporting on risks and internal risk management processes of companies tend
to focus on the risks to the company rather than the risks to those external rights-
holders which are actually or potentially affected. Risks are assessed based on
materiality of the risks to the company, instead of the severity of the risks to those
affected. Even severe harms to those affected may not necessarily pose material risks to
the company, whether in the short, medium or long term.
This continues to be the case despite guidance which clarifies that the relevant risks for
due diligence must extend beyond the risks of the company to those who are affected
(the rights-holders), such as in the UNGPs,847 the OECD Guidelines,848 and the EU
Commissions’ non-binding guidelines on non-financial reporting.849
The 2018 report of the United Nations High Commissioner for Human Rights on
improving accountability and access to remedy for victims of business-related human
rights abuse clarifies in this respect that:850
841 The Joint Ethical Trading Initiatives, ”Guide to Buying Responsibly” (7 September 2017), available at:
https://www.ethicaltrade.org/resources/guide-to-buying-responsibly. 842 Fair Wear Foundation, above n807. 843 Ibid. 844 Oxfam, “Supermarkets Scorecard”, available at: https://www.oxfam.org/en/behindtheprice/scorecard. 845 Oxfam, “What are supermarkets doing to tackle human suffering in their supply chains” (3 July 2019), available at:
https://views-voices.oxfam.org.uk/2019/07/supermarkets-supply-chains/. 846 Commentary to UNGP 17. 847 Ibid. 848 OECD, “Guidelines for Multinational Enterprises” (2011), available at: http://www.oecd.org/daf/inv/mne/48004323.pdf. 849 The EU Commission’s non-binding guidelines for non-financial reporting expect companies to disclose “relevant information
on the actual and potential impacts of its operations on the environment” (4.6a), “material information on social and employee matters” (4.6b), “material information on potential and actual impacts of their operations on right-holders” (4.6c) and so forth.
Communication from the Commission, “Guidelines on non-financial reporting (methodology for reporting non-financial
information)” (2017/C 215/01), available at: https://ec.europa.eu/info/publications/170626-non-financial-reporting-
guidelines_en. 850 UN Human Rights Council, “Improving accountability and access to remedy for victims of business-related human rights
abuse: The relevance of human rights due diligence to determinations of corporate liability”, A/HRC/38/20/Add.2 (1 June
2018) at para 8.
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Human rights due diligence should not be confused with other forms of legal due
diligence activities, such as those carried out in preparation for corporate mergers
and acquisitions, or those required for compliance monitoring purposes in areas such
as banking or anti-corruption. The key difference between these concepts is that the
latter group is generally concerned with identifying, preventing, and mitigating risks
to business; whereas human rights due diligence is concerned with risks to people,
specifically from adverse human rights impacts that a business enterprise may cause
or contribute to through its own activities, or which may be directly linked to its
operations, products, or services by its business relationships. As such, human rights
due diligence demands methodologies that are informed, in scope and procedural
terms, by internationally recogniszed human rights standards, and should “[i]nvolve
meaningful consultation with potentially affected groups and other relevant stakeholders.”
2.4 Regulatory gap between existing legal framework and Member States’
obligations
The EU and its individual Member States have various international and EU-level legal
obligations and commitments for human rights and the environment. Examples include:
International human rights treaties such as:
o The Universal Declaration of Human Rights
o The International Covenant on Civil and Political Rights
o The International Covenant on Economic, Social and Cultural
o Rights
o The principles concerning fundamental rights in the eight ILO core
conventions
o The Declaration on Fundamental Principles and Rights at Work
o The International Convention on the Elimination of All Forms of Racial
Discrimination
o The Convention on the Elimination of All Forms of Discrimination against
Women
o The Convention against Torture and Other Cruel, Inhuman or Degrading
Treatment or Punishment
o The United Nations Convention on the Right of the Child
o The International Convention on the Protection of the Rights of All Migrant
Workers and Members of Their Families
o The Convention on the Rights of Persons with Disabilities
o The International Convention for the Protection of All Persons from Enforced
Disappearance
o The United Nations Declaration on the Rights of Indigenous People
o The Convention for the Protection of Human Rights and Fundamental
Freedoms (“European Convention on Human Rights”)
The Charter of Fundamental Human Rights of the European Union
The UN Guiding Principles on Business and Human Rights 851
The Paris Agreement on climate change
The UN 2030 Agenda for Sustainable Development of 2015
The ILO Tripartite declaration of principles concerning multinational enterprises and
social policy (“MNE Declaration”) of March 2017
851 In its 2011 Communication on Corporate Social Responsibility, the European Commission affirmed that: "Better
implementation of the UN Guiding Principles will contribute to EU objectives regarding specific human rights issues and core
labour standards, including child labour, forced prison labour, human trafficking, gender equality, non-discrimination, freedom
of association and the right to collective bargaining.” Communication from the Commission to the European Parliament, the
Council, the European Economic and Social Committee and the Committee of the Regions, “A renewed strategy 2011-14 for
Corporate Social Responsibility", COM(2011) 681 final. See also European Commission, “Commission Staff working document
on implementing UNGPs - State of Play”, Brussels 16 July 2015, SWD(2015) 144 final at 6.
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The ILO Centenary Declaration for the Future of Work of 2019 The Beijing Declaration and Platform for Action of 1995
The Women's Empowerment Principles of 2010
Many of these standards expect Member States to take steps to ensure that people are
protected from human rights and environmental harms, including by corporate actors. The
UNGPs phrase this international law obligation as follows:
States must protect against human rights abuse within their territory and/or
jurisdiction by third parties, including business enterprises. This requires taking
appropriate steps to prevent, investigate, punish and redress such abuse through
effective policies, legislation, regulations and adjudication. 852
These state obligations include the duty to ensure that those affected have access to
remedies, as confirmed in UNGP 25:
As part of their duty to protect against business-related human rights abuse,
States must take appropriate steps to ensure, through judicial, administrative,
legislative or other appropriate means, that when such abuses occur within their
territory and/or jurisdiction those affected have access to effective remedy.
The Commentary to UNGP 25 further confirms:
Unless States take appropriate steps to investigate, punish and redress business-
related human rights abuses when they do occur, the State duty to protect can
be rendered weak or even meaningless.
There seems to be a consensus that states are allowed (and some argue, obliged)853 to
regulate the adverse human rights and environmental impacts of their multinational
corporations that occur outside their territories. In this respect, John Ruggie, the author
of the UNGPs, explained, in a letter he recently wrote as a response to a public letter by
Swiss business associations regarding their position on the Swiss Responsible Business
Initiative that:854
Guiding Principle 2 provides that states should make clear that the responsibility
to respect applies throughout a company's operations. The commentary to
Principle 2 goes on to explain that under international human rights law states
are not generally required to regulate the extraterritorial activities of businesses
domiciled in their jurisdictions, but nor are they generally prohibited from doing
so provided that there is a recognized jurisdictional basis. The commentary notes
that states have adopted a range of approaches in this regard, specifically
852 UNGP 1. 853 Sigrun Skogly, Beyond National Borders: States’ Human Rights Obligations in International Cooperation (Intersentia, 2004); Robert McCorquodale and Penelope Simons, ”Responsibility Beyond Borders: State Responsibility for Extraterritorial Violations
by Corporations of International Human Rights Law” (2007) 70: 4 Modern Law Review 598; Daniel Augenstein and David
Kinley, ”When human rights ’responsibilities’ become ’duties‘: the extraterritorial obligations of states that bind corporations” in
Surya Deva and David Bilchitz (eds.), Human Rights Obligations of Business: Beyond the corporate responsibility to respect?
(Cambridge University Press, 2013) 271; Smita Narula, ”International financial institutions, transnational corporations and
duties of states” in Malcolm Langford, Wouter Vandenhole, Martin Scheinin and Willem van Genugten (eds.), Global Justice,
State Duties. The Extraterritorial Scope of Economic, Social and Cultural Rights in International Law (Cambridge University
Press, 2014) 114; Olivier De Schutter, ”Towards a New Treaty on Business and Human Rights” (2016) 1:1 Business and
Human Rights Journal 41; Sara L. Seck, ”Conceptualizing the Home State Duty to Protect” in Karin Buhmann, Lynn Roseberry,
Mette Morsing (eds.), Corporate Social and Human Rights Responsibilities. Global, Legal and Management Perspectives (Palgrave Macmillan, 2011) 25. Nadia Bernaz, ”Enhancing Corporate Accountability for Human Rights Violations: Is
Extraterritoriality the Magic Potion?“ (2013) 117 Journal of Business Ethics 493. See also Claire Methven O'Brien, “The Home
State Duty to Regulate the Human Rights Impacts of TNCs Abroad: A Rebuttal” (2018) 3:1 Business and Human Rights Journal
47. 854 BHHRC, “Companies clarify position on Swiss mandatory human rights due diligence initiative”, available at:
https://www.business-humanrights.org/en/companies-clarify-position-on-swiss-mandatory-human-rights-due-diligence-
initiative.
224
including domestic legislation that may have extraterritorial effects. In short,
extraterritoriality is not per se ultra vires.
Olivier De Schutter who has written extensively on the topic, explains that:855
Grounding the exercise of extraterritorial jurisdiction on the principle of active
personality would appear to be particularly justified in the case of corporations
which have the ‘nationality’ of the forum State, especially where the prohibitions
relate to human rights violations. Indeed, the two justifications traditionally
offered for basing extraterritorial jurisdiction on this principle seem to converge in
this case. A first justification has been, traditionally, that since nationals
traditionally may not be extradited, the extraterritorial application of national
legislation on the basis of the principle of active personality ensures that certain
crimes would not remain unpunished…Second, by exercising extraterritorial
jurisdiction on the basis of the active personality principle, a State ensures that
its nationals will not be acting in violation of certain fundamental values abroad,
by adopting forms of behaviour which would be considered as offences in the
forum State : what the nationals of a State may not do at home, they should not
be allowed to do in another State, where the seriousness of the act justifies such
an extension of the geographical reach of the prohibition.
Public international law recognises that home States have certain obligations in relation
to the regulation of the extraterritorial activities of the companies domiciled on their
territory. For example, General Comment No. 16 of the UN Convention on the Rights of
the Child provides that:856
Home States also have obligations [...] to respect, protect and fulfil children's
rights in the context of businesses' extraterritorial activities and operations,
provided that there is a reasonable link between the State and the conduct
concerned. A reasonable link exists when a business enterprise has its centre of
activity, is registered or domiciled or has its main place of business or substantial
business activities in the state concerned.
In addition, Paragraph 30 of the General comment No. 24 on State obligations under the
International Covenant on Economic, Social and Cultural Rights in the context of
business activities provides that:857
The extraterritorial obligation to protect requires States parties to take steps to
prevent and redress infringements of Covenant rights that occur outside their
territories due to the activities of business entities over which they can exercise
control, especially in cases where the remedies available to victims before the
domestic courts of the State where the harm occurs are unavailable or
ineffective.
Paragraph 31 adds that:858
This obligation extends to any business entities over which States parties may
exercise control, in accordance with the Charter of the United Nations and
applicable international law. Consistent with the admissible scope of jurisdiction
855 Olivier De Schutter, "Extraterritorial Jurisdiction as a tool for improving the Human Rights Accountability of Transnational
Corporations", Faculté de Droit de l'Université Catholique de Louvain (2006), available at: https://www.business-humanrights.org/sites/default/files/reports-and-materials/Olivier-de-Schutter-report-for-SRSG-re-extraterritorial-jurisdiction-
Dec-2006.pdf. 856 TOR p. 6; General Comment no. 16 on State obligations regarding the impact of the business sector on children's rights. 857 UN Committee on Economic, Social and Cultural Rights, “General comment No. 24 on State obligations under the
International Covenant on Economic, Social and Cultural Rights in the context of business activities”, E/C.12/GC/24 (10 August
2017) at para 30. 858 Ibid para 31.
225
under general international law, States may seek to regulate corporations that
are domiciled in their territory and/or jurisdiction: this includes corporations
incorporated under their laws, or which have their statutory seat, central
administration or principal place of business on their national territory. States
parties may also utilize incentives short of the direct imposition of obligations,
such as provisions in public contracts favouring business entities that have put in
place robust and effective human rights due diligence mechanisms, in order to
contribute to the protection of economic, social and cultural rights at home and
abroad.
Paragraph 33 further states that:859
In discharging their duty to protect, States parties should also require
corporations to deploy their best efforts to ensure that entities whose conduct
those corporations may influence, such as subsidiaries (including all business
entities in which they have invested, whether registered under the State party’s
laws or under the laws of another State) or business partners (including
suppliers, franchisees and subcontractors), respect Covenant rights. Corporations
domiciled in the territory and/or jurisdiction of States parties should be required
to act with due diligence to identify, prevent and address abuses to Covenant
rights by such subsidiaries and business partners, wherever they may be located.
The Committee underlines that, although the imposition of such due diligence
obligations does have impacts on situations located outside these States’ national
territories since potential violations of Covenant rights in global supply chains or
in multinational groups of companies should be prevented or addressed, this does
not imply the exercise of extraterritorial jurisdiction by the States concerned.
Appropriate monitoring and accountability procedures must be put in place to
ensure effective prevention and enforcement. Such procedures may include
imposing a duty on companies to report on their policies and procedures to
ensure respect for human rights, and providing effective means of accountability
and redress for abuses of Covenant rights.
The current lack of access to remedy for victims of corporate human rights and
environment impacts (see subsection below), the absence of an enforceable legal
instrument requiring due diligence at EU level, and very few examples of such laws at
Member State level, combined with the low levels of implementation of due diligence by
companies, suggest a gap between the existing legal framework, and Member States’
international and EU human rights and environmental obligations.
2.5 Increasing fragmentation of due diligence requirements across sectors,
size of companies, countries, and area of application
There is currently no general legal duty at EU or international level which requires
companies to undertake due diligence for human rights and environmental impacts
caused by their supply or value chain.
However, since the adoption of the UNGPs in 2011, domestic laws and industry
standards have increasingly been introducing due diligence requirements. Although
these requirements are based on the UNGPs standard of due diligence, often echoing the
UNGPs wording, these existing requirements have not provided uniformity. Instead, they
often apply only to certain sectors or issues, and to different categories of companies
based on domicile, country of operation or turnover. Multinational companies in
859 Ibid para 33.
226
particular are simultaneously subject to a mosaic of fragmented requirements at
domestic and industry level.860
The OECD Guidelines expect due diligence to cover all human rights and environmental
impacts. Similarly, due diligence in the UNGPs applies to all business enterprises
regardless of sector and size. Stakeholders have confirmed that there is no sector of
business which does not pose any potential risks to human rights or the environment.
Yet current laws and industry regulatory measures which only apply to certain sectors,
products or commodities fail to prevent or address adverse impacts which take place
outside of this sector. Examples include the EU conflict minerals regulation,861 which only
applies to companies sourcing tin, tantalum, tungsten and gold from conflict-affected
and high risks areas, or the EU Timber Regulation862 which applies to operators who
place timber or timber products on the EU market.
Similar limitations apply to regulation which only applies to a specific issue, such as
modern slavery or child labour. Stakeholders have indicated that these regulations result
in processes which may overlook other human rights or environmental impacts.863 For
example, corporate due diligence processes which are limited to certain issues, such as
child labour, have been found to be inadequate for the purposes of the OECD Guidelines’
due diligence requirements by the Norwegian National Contact Point.864 Scholars have
also warned against the risk of disincentivising stronger forms of regulation.865
Evidence has shown that where companies fail to focus on the entire spectrum of human
rights which they may potentially impact, they are significantly more likely to overlook
human rights impacts in their own operations and in their supply chain.866
When presenting the “Protect, Respect and Remedy” Framework around which the
UNGPs are based, John Ruggie, answering the call from certain stakeholders for focus on
a limited list of human rights for which companies would have responsibility, stated
that:867
Business can affect virtually all internationally recognized rights. Therefore, any
limited list will almost certainly miss one or more rights that may turn out to be
significant in a particular instance, thereby providing misleading guidance.
The deliberate focus on the entire spectrum of human rights (often referred to as using
the “human rights lens”) also ensures that vulnerable groups are within the scope of the
due diligence, including women, children, migrant workers and LGBTI individuals. For
example, in the interviews conducted for this study stakeholders have raised the
importance of including gender aspects in supply chain due diligence. A recent report by
the UN Working Group on Business and Human Rights also highlighted the differentiated
and disproportionate impact of business activities on woman and girls868 and the
860 Elise Groulx Diggs, Milton C. Regan and Beatrice Parance, “Business and Human Rights as a Galaxy of Norms” (2019) 50:2
Georgetown Journal of International Law 309. 861 Regulation (EU) 2017/821 of the European Parliament and of the Council of 17 May 2017 laying down supply chain due
diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected
and high-risk areas. 862 Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations
of operators who place timber and timber products on the market. 863 See also Macchi and Bright, above n833. 864 Norwegian National Contact Point for the OECD Guidelines for Multinational Enterprises, Complaint from Lok Shakti Abhiyan,
Korean Transnational Corporations Watch, Fair Green and Global Alliance and Forum for Environment and Development vs
Posco (South Korea), ABP/APG (Netherlands) and NBIM (Norway), Final Statement, 27 May 2013. 865 See also Ingrid Landau, ”What are we missing by focusing on modern slavery?“ (2016), available at: https://www.business-humanrights.org/en/what-are-we-missing-by-focusing-on-modern-slavery. 866 McCorquodale, Smit, Neely and Brooks, above n823. 867 UN Human Rights Council, ”Protect, Respect and Remedy: A Framework for Business and Human Rights”, A/HRC/8/5 (7
April 2008) at para 6. 868 See UN Human Rights Council, "Gender dimensions of the Guiding Principles on Business and Human Rights: Report of the
Working Group on the issue of human rights and transnational corporations and other business enterprises", A/HRC/41/43 (23
May 2019). See also on these issues Kelly Groen and Lis Cunha, “Due diligence laws must not leave women behind”, Business
227
corresponding need for companies to apply a gender perspective to due diligence when
appropriate and to make particular efforts to track the effectiveness of their responses to
impacts on individuals from groups that may be at heightened risk of vulnerability, in
line with the UNGPS and the OECD Due Diligence Guidance for Responsible Business
Conduct.869
2.6 Lack of legal certainty about due diligence requirements for human
rights and environmental impacts
Business stakeholders in particular report a high level of concern about the current lack
of legal certainty about due diligence requirements for human rights and environmental
impacts. This legal uncertainty arises because, even in the absence of a general legal
duty for due diligence, companies are increasingly facing legal and other risks and
costs870 as a result of a failure to undertake due diligence.
Examples include:
Companies are increasingly subject to high-profile lawsuits for alleged failure to
prevent human rights or environmental harms.871 These cases are often brought
in tort law against parent companies for the harms caused by their subsidiaries,
or even in the supply chain.872
Various complaints have been filed in OECD NCPs on the basis of companies’
failure to exercise due diligence for their human rights or environmental impacts,
including by investee companies. Although the NCPs’ statements are not legally
binding, they are viewed as giving content to the due diligence which is expected
from companies.873
New laws or legal proposals are creating a patchwork of legislative requirements
or expected legislative requirements (if proposed laws should be passed).874
These laws are often applicable to multinational companies which operate across
the relevant countries or sectors.
Voluntary or non-binding standards, including the UNGPs and industry standards,
are increasingly being used in civil law or tort claims to give content to the
standard of care which was expected of the company in the relevant
circumstances.875 For instance, in its recent decision in Lungowe v Vedanta, the
and Human Rights Resource Centre (25 June 2019), available at: https://www.business-humanrights.org/en/due-diligence-
laws-must-not-leave-women-behind; Joanna Bourke Martignoni and Elizabeth Umlas, “Gender-Responsive Due Diligence for
Business Actors: Human Rights-Based Approaches“, Geneva Academy, Academic Briefing No 12 (December 2018), available
at: https://www.geneva-academy.ch/joomlatools-files/docman-files/Academy%20Briefing%2012-interactif-V3.pdf. 869 UN Working Group Report ibid at paras 31 and 37. 870 See for instance, Rachel Davis and Daniel Franks, “Costs of Company-Community Conflict in the Extractive Sector”,
Corporate Social Responsibility Initiative Report N° 66 (2014), available at:
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/cri/files/Costs%20of%20Conflict_Davis%20%20Fran
ks.pdf - a report that explores the costs of company-community conflict. The report explored the cost of failure to undertake appropriate due diligence resulting in conflict between companies and local communities in the extractive sector. The report
revealed that “the most frequent costs were those arising from lost productivity due to temporary shut downs or delays [...]
the greatest costs [...] were the opportunity costs in terms of lost value linked to future projects, expansion plans or sales that
did not go ahead. The costs more often overlooked by companies were indirect costs resulting from staff being diverted to
managing conflict - particularly senior management time - including in some cases that of the CEO”. 871 Marx, Bright and Wouters, above n826 at 18. 872 For further examples see Section III Regulatory Review of this study. 873 For instance, Clean Clothes Campaign Danmark and Aktive Forbrugere (Active Consumers) filed a complaint against the
PWT Group to the Danish NCP in December 2014, alleging that PWT Group had failed to carry out due diligence in relation to
its supplier, the textile manufacturer New Wave Style, to prevent the collapse of the Rana Plaza building in Bangladesh which housed the supplier. On this complaint, see: https://businessconduct.dk/file/631421/mki-final-statements.pdf. 874 See for instance, BHRRC, “National movements for mandatory human rights due diligence in European countries”, available
at: https://www.business-humanrights.org/en/national-movements-for-mandatory-human-rights-due-diligence-in-european-
countries. 875 See for instance, in the Netherlands Court of Appeal of The Hague, Eric Barizaa Dooh of Goi and others v Royal Dutch Shell
Plc and Others, 200.126.843 (case c) + 200.126.848 (case d), December 18, 2015; and in Canada Araya v Nevsun Resources
Ltd., 2016 BCSC 1856; Choc v Hudbay Minerals Inc., 2013 ONSC 1414. On these issues, see for instance Claire Bright, “The
228
UK Supreme Court found that a parent company may owe a duty of care to the
local communities affected by the operations of its foreign subsidiaries, based on
the group-wide policies adopted by the parent company and its public
commitments.876 This is a particularly important case given the influential nature
of UK case law in common law countries throughout the world, and the fact that it
represents the “first decision by any superior court in the world directly on this
issue”.877
Companies that are already taking extensive due diligence steps and dedicating
significant resources to these matters report that they are sometimes being
singled out and targeted for litigation.878 Often, their voluntary commitments,
global policies or efforts to undertake transparent reporting are being used to
demonstrate an assumption of a duty of care or relationship of proximity with the
claimants. Companies’ legal advisers are faced with directly contradictory legal
risks: the risks associated with a failure to implement global policies and
processes to prevent and address human rights and environmental harms, as
opposed to the risk of being sued on the basis of taking such proactive steps.879
The perceived targeting in litigation of those companies that are “leaders” is also a result
of lack of legal certainty, insofar as claimants do not currently have a guaranteed legal
basis to pursue those companies that have not taken these proactive steps.
A recent report from ClientEarth and Global Witness notes in this respect that:880
[E]ffective due diligence is in the interest of companies themselves as environmental
considerations can entail significant material risks. These can include operational
blockages, as well as reputational, financial and legal risks. Legislation requiring
companies to identify, prevent and mitigate environmental damage and human rights
abuses can help them manage these risks and provide a level playing field for
companies.
2.7 Lack of access to remedy for those affected by the adverse human rights
or environmental impacts of EU companies
Currently, there is a well-documented lack of access to remedies for those affected by
corporate human rights and environmental harms of EU companies.881 This applies to
persons affected within the EU, as well as outside of the EU.
Civil Liability of the Parent Company for the Acts or Omissions of Its Subsidiary: The Example of the Shell Cases in the UK and
in the Netherlands” in Angelica Bonfanti (ed.), Business and Human Rights in Europe: International Law Challenges (Routledge,
2018) 212. 876 Lungowe v Vedanta Resources plc [2019] UKSC 20, para 53: 'Even where group-wide policies do not of themselves give rise
to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by
training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, it seems to me
that the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising
that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very
omission may constitute the abdication of a responsibility which it has publicly undertaken.' 877 Robert McCorquodale, “Vedanta v. Lungowe Symposium: Duty of Care of Parent Companies” (18 April 2019), available at:
http://opiniojuris.org/2019/04/18/symposium-duty-of-care-of-parent-companies/. 878 This has been reported in our interviews and informational conversations with companies. See also Christopher Patz, “The
Misuse of Abuse: Fears of Potentially Abusive Litigation are Overriding the Reality of Abusive Companies in Europe" (15 April
2018), available at: https://www.opendemocracy.net/en/can-europe-make-it/misuse-of-abuse-fears-of-potentially-abusive-
litigation-are-over/. 879 Peter Nestor and Jonathan Drimmer, “How Companies Should Respond to the Vedanta Ruling”, Business for Social
Responsibility (30 April 2019), available at: https://www.bsr.org/en/our-insights/blog-view/how-companies-should-respond-
to-the-vedanta-ruling. See also Section II Market Practices in this study. 880 ClientEarth and Global Witness, above n 814 at 3. 881 Marx, Bright and Wouters, above n826; Jennifer Zerk, “Corporate liability for gross human rights abuses: Towards a fairer
and more effective system of domestic law remedies. A report prepared for the Office of the UN High Commissioner for Human
Rights”, available at:
https://www.ohchr.org/Documents/Issues/Business/DomesticLawRemedies/StudyDomesticeLawRemedies.pdf; Gwynne
Skinner, Robert McCorquodale and Olivier De Schutter, “The Third Pillar: Access to Judicial Remedies for Human Rights
Violations by Transnational Business”, available at: http://corporatejustice.org/documents/publications/eccj/the_third_pillar_-
access_to_judicial_remedies_for_human_rights_violation.-1-2.pdf; Amnesty International, “Injustice Incorporated: Corporate
229
Victims of corporate human rights abuses do not have any generally acknowledged or
practically available access to remedies against multinational companies.882 Harms often
happen in (developing) host states in which victims frequently struggle to access legal
remedies.883 As a result, victims often attempt to bring their claims in the relevant
multinational company’s (developed) home state. However, even there they face many
barriers to accessing legal remedies, both legal and practical. Examples of such barriers to
access to remedies include:
Difficulties and costs for claimants to secure legal representation884
Resources and time required to prove claimants’ onus and issues related to access
to information885
Restrictive time-limits on bringing claims886
Immunities and non-justiciability doctrines887
Jurisdictional challenges888
Issues relating to the applicable law889
The complexity of corporate structures and the attribution of legal responsibility
among the members of a corporate group890
Proving human rights violations891
The reach and enforcement of remedies892
Many of these barriers stem from the fact that private international law envisage
"corporate liability within the limits of compartmentalised, local law" but is "clearly out of
touch with the global political economy".893 The drivers of these barriers to access to
remedy include:
Traditional understandings of territorial jurisdiction have resulted in procedural
hurdles for foreign defendants in host states to bring claims in companies’ home
states.894 This corporate legal construct has been noted to be “extremely
successful in facilitating business investment and the protection of shareholders'
interests, but it has often led to unwanted outcomes for human rights and the
environment”.895
Abuse and the Human Right to Remedy” (2014), available at:
https://www.amnesty.org/download/Documents/8000/pol300012014en.pdf. 882 Marx, Bright and Wouters, ibid at 16. 883 Ibid at 18. 884 Amnesty International, above n881. 885 Marx, Bright and Wouters, above n826 at 113. 886 Skinner, McCorquodale and De Schutter, above n881 at 38. 887 Ibid at 39. 888 Marx, Bright and Wouters, above n826 at 114. 889 Ibid at 116. 890 Zerk, above n881 at 43. 891 Skinner, McCorquodale and De Schutter, above n 881 at 43. 892 Ibid at 62. 893 Horatia Muir-Watt, “Private International Law Beyond the Schism” (2011) 2:3 Transnational Legal Theory 347 at 386. 894 On these issues, see for instance Elena Blanco, ”Jurisdiction, access to remedy in business and human rights cases and the corporate structure: A tale of two cases” (2019), available at: https://www.cambridge.org/core/blog/2019/05/07/jurisdiction-
access-to-remedy-in-business-and-human-rights-cases-and-the-corporate-structure-a-tale-of-two-cases/. 895 A report of the United Nations High Commissioner for Human Rights noted that: “The company law doctrine of ‘separate
corporate personality’ is recognized in most, if not all, jurisdictions. Under this doctrine, each company, as a separately
incorporated legal entity, is treated as having a separate existence from its owners and managers. Consequently, a company
(a parent company) that owns shares in another company (a subsidiary) will not generally be held legally responsible for acts,
omissions or liabilities of that subsidiary merely on the basis of the shareholding.” UNHCHR, “Improving accountability and
access to remedy for victims of business-related human rights abuse”, A/HRC/32/19 (10 May 2016) at 9. In addition, Stephen
Turner writes: “The second design feature is that corporate law around the globe facilitates limited liability for shareholders.
This means that shareholders of 'limited liability' companies (which represent the vast majority) are not liable for all of the debts of a company; they are only liable up to the amount that they subscribed to through their share purchase. [...] As a
result, where a company fails and enters into liquidation, the creditors of that business can naturally only seek to recover their
debts from the shareholders to a limited extent. Similarly, where a company does not have sufficient funds to compensate
those whose human rights it has negatively impacted or to remedy environmental degradation it has caused, the shareholders
can enjoy protection from full liability.” Stephen J. Turner, “Business practices, human rights and the environment” in James R.
May and Erin Daly (eds.), Human Rights and the Environment: Legality, Indivisibility, Dignity and Geography, Elgar
Encyclopedia of Environmental Law series (Edward Elgar Publishing, 2019) at 378. See also 376.
230
The traditional concept of separate corporate personality allows companies to
escape liability for the actions of others, including subsidiaries and suppliers, even
where the relevant company had significant factual control over these entities.896
The lack of specific European private international law rules adapted to the
specificity of business-related human rights and environmental claims. A recent
report commissioned by the European Parliament on the issue of access to justice
for victims of corporate human rights abuses in third countries recommended, in
this respect:
o A revision of the Brussels I Recast Regulation in order to include in
particular:
A provision extending the jurisdiction of the domicile of the
defendant EU parent company to the claims over its foreign
subsidiary or business partners when the claims are so closely
connected that it is expedient to hear and determine them
together.
A provision establishing a forum necessitatis on the basis of which
the courts of an EU Member State may, on an exceptional basis,
hear a case brought before them when the right to a fair trial or
access to justice so requires, and the dispute has sufficient
connection with the EU Member State of the court seized.
o A revision of the Rome II Regulation in order to include in particular a
choice-of law provision specific to business-related human rights claims
against EU companies that would allow the claimant a choice between the
law of the place where the damage occurred, the law of the place where the
event giving rise to the damage occured and the law of the place where the
defendant company is situated.
The Victims' Rights Directive has fallen short of ensuring that victims of
corporate crimes are afforded access to justice.
The third pillar of the UNGPs is about access to remedy, which is also a human right in itself
(the right to remedy). Ensuring access to effective remedy for victims is a crucial part of
both the State's duty to protect and the corporate responsibility to respect human rights.
The OECD guidelines note, in relation to the due diligence processes of companies, that:
Potential impacts are to be addressed through prevention or mitigation, while actual
impacts are to be addressed through remediation.
In addition, Daniel Augenstein argues that "third-country victims seeking to vindicate
their rights through transnational tort litigation in a European home state of MNCs come
under that state's territorial authority and control within the meaning of Article 1 of the
ECHR", and that, accordingly, domestic courts adjudicating their case "must comply with
896 For instance, in the Unilever case, the English domiciled parent company and its Kenyan subsidiary were accused of complicity in human rights abuses by virtue of failing to protect its tea workers from the foreseeable risk of ethnic violence.
The UK High Court and the Court of Appeal rejected the claims on the basis that the parent company did not owe a duty of
care to the claimants. Similarly, in the Shell case, the UK Court of Appeal had rejected the claim against the parent company
and its Nigerian subsidiary for health and environmental damage arising out of its activities in the Niger Delta on the basis that
claimants could not demonstrate a properly arguable case that the parent company owed them a duty of care. However, the
UK Supreme Court recently reaffirmed that a parent company may, in certain circumstances, owe a duty of care to the local
communities re-affected by the activities of its subsidiaries. On this issue, see McCorquodale, above n877.
231
the state's international human rights obligations to ensure access to justice and
effective civil remedies".897
The existing legal framework (both internationally and domestically) has failed to address
the realities of transnational business in this respect. It is increasingly recognised that the
limitations posed by traditional notions of territorial jurisdiction and separate corporate
identity need to be updated to address the impacts of globalised supply chains and complex
corporate groups. In addition, the remediation role performed by grievance mechanisms in
connection to companies' supply chains remains extremely limited.898
3. Legal basis for and policy background of a possible future EU intervention
3.1 Legal basis for a possible future EU intervention
To address the problems as described in the previous section, any possible future EU
intervention would be based on the following legal basis:
The regulation of companies' due diligence requirements is a matter of company
law which falls within the EU shared competences. In particular, Article 50(1) and
(2)g of the Treaty on the Functioning of the European Union (TFEU) gives
competence to the EU to act, by means of directives, to harmonise national
company laws so as to attain freedom of establishment.899 For example, the Non-
Financial Reporting Directive (NFR Directive)900 was adopted by the EU on this
basis. In addition, Article 114 TFEU, in conjunction with Article 50, allows the EU
to approximate legislation with the object of ensuring the proper functioning of
the internal market.901
The EU's regulatory competences in terms of promoting respect for human rights
when adopting and implementing EU legislation, as well as with regard to its
relationships with third countries, are grounded in the Treaty of the European
Union (TEU). Article 2 of the TEU affirms that human rights are among the values
upon which the EU has been founded, together with the respect for human
dignity, freedom, democracy, equality and the rule of law.
The Charter of Fundamental Rights of the European Union, which is legally
binding, applies to the EU in all of its actions and to Member States whenever
they implement EU law.902 The Charter sets out a comprehensive framework for
the duties to “respect, protect and promote”, in line with the international human
rights obligations903 that are already binding on the EU Member States when
implementing EU law.904 Although it does not extend the EU competences, the
897 Daniel Augenstein, “Torture as Tort? Transnational Tort Litigation for Corporate-Related Human Rights Violations and the
Human Right to a Remedy” (2018) 18:3 Human Rights Law Review 593. 898 See Market Practice section. 899 ECCJ, “The EU Competence and Duty to Regulate Corporate Responsibility to Respect Human Rights through mandatory
Human Rights Due Diligence”, ECCJ Briefing (November 2017) at 2. 900 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as
regards disclosure of non-financial and diversity information by certain large undertakings and groups. 901 Ibid at 2. 902 European Commission SWD(2015), above n851 at 4. 903 As discussed above in the context of EU Member States’ obligations, the EU and its Member States have committed to a
range of international human rights obligations through the various human rights treaties. These include the Universal
Declaration of Human Rights, the International Covenant on Civil and Political Rights, the International Covenant on Economic,
Social and Cultural Rights, the principles concerning fundamental rights in the eight ILO core conventions as set out in the Declaration on Fundamental Principles and Rights at Work, the International Convention on the Elimination of All Forms of
Racial Discrimination, the Convention on the Elimination of All Forms of Discrimination against Women, the Convention against
Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment, the United Nations Convention on the Right of the
Child, the International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families, the
Convention on the Rights of Persons with Disabilities, the International Convention for the Protection of All Persons from
Enforced Disappearance, the United Nations Declaration on the Rights of Indigenous People. 904 Ibid at 4.
232
Charter requires the EU and the Member States to comply with human rights
standards whenever EU law is implemented.905
With regard to the Union's external action, Article 3.5 of the TEU provides that:
"in its relations with the wider world, the Union shall uphold and promote its
values and interests and contribute to the protection of its citizens. It shall
contribute to peace, security, the sustainable development of the Earth, solidarity
and mutual respect among peoples, free and fair trade, eradication of poverty
and the protection of human rights, in particular the rights of the child, as well as
to the strict observance and the development of international law, including
respect for the principles of the United Nations Charter".
Article 21.2 stipulates that "the Union shall define and purse common policies and
actions, and shall work for a high degree of cooperation in all fields of
international relations, in order to: [...] consolidate and support democracy, the
rule of law, human rights and the principles of international law".
3.2 Policy background of a possible future EU intervention
In addition to the above legal obligations, the international and EU policy documents and
strategies that are relevant for the intervention include the following (in chronological
order). Some of these are discussed above in the context of EU Member States’
international obligations and commitments, as well as in the TOR:
The UN Convention to Combat Desertification in those countries experiencing
serious drought and/or desertification, particularly in Africa906
The Basel Convention on the Control of Transboundary Movements of Hazardous
Wastes and Their Disposal907
The Convention on International Trade in Endangered Species of Wild Fauna and
Flora908
The UNECE Aarhus Convention on Access to Information, Public Participation in
Decision-making and Access to Justice in Environmental Matters909
The Cartagena Protocol on Biosafety910
Directive 2004/35/CE of the European Parliament and of the Council of 21 April
2004 on environmental liability with regard to the prevention and remedying of
environmental damage
The UN Guiding Principles on Business and Human Rights911
The UN Human Rights Council Resolution on the Elaboration of an international
legally binding instrument on transnational corporations and other business
enterprises with respect to human rights, establishing an open-ended
intergovernmental working group on transnational corporations and other
business912
The Paris Agreement on climate change913
The UN 2030 Agenda for Sustainable Development914
The ILO Tripartite declaration of principles concerning multinational enterprises
and social policy (MNE Declaration)915
905 Ibid at 4. 906 1994, available at: https://www.unccd.int/sites/default/files/relevant-links/2017-01/UNCCD_Convention_ENG_0.pdf. 907 1989, available at: http://www.basel.int/theconvention/overview/tabid/1271/default.aspx. 908 1973, available at: https://www.cites.org/eng/disc/what.php. 909 1998, available at: https://www.unece.org/env/pp/treatytext.html. 910 2000, available at: http://bch.cbd.int/protocol/text/. 911 Discussed at length in previous sections. 912 Resolution A/HRC/RES/26/9 (14 July 2014), available at:
http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/RES/26/9. 913 Available at: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement. 914 Available at: http://ec.europa.eu/environment/sustainable-development/SDGs/index_en.htm. 915 2017, available at: https://www.ilo.org/empent/areas/mne-declaration/lang--en/index.htm.
233
The 2016 ILO Resolution concerning decent work in global supply chains916
The ILO Centenary Declaration for the Future of Work917
The 2017 G20 Leaders' declaration on Sustainable Global Supply Chains918
The 2017 G20 declaration of Employment and Labour Ministers919
The 2019 G7 Communiqué of Employment and Labour Ministers920
The European Commission Communication of 22 November 2016 “Next steps for
a sustainable European future”921
The European Parliament Resolution of 27 April 2017 on the EU flagship initiative
on the garment sector922
The Council conclusions on the EU and Responsible Global Value Chains923
The European Commission Staff Working Document on Sustainable garment
value chains924
The Council of the European Union Conclusions on business and human rights, 20
June 2016
The Victims' Rights Directive925
The Council of Europe Recommendation to Member States on the implementation
of the UNGPs by Member States926
The Stockholm Convention on persistent organic pollutions (POPs), revised in
2017927
The High-Level Expert Group on Sustainable Finance (HLEG) Final Report, 31
January 2018928
The European Commission Action Plan on Financing Sustainable Growth (Action
Plan on Sustainable Finance) of 2018929
The European Commission Report on Critical Raw Materials and the Circular
Economy
The European Parliament report on sustainable finance of 4 May 2018930
The European Parliament Report on the proposal for a Regulation of the European
Parliament and of the Council on the alignment of reporting obligations in the
field of environment policy of 15 October 2018931
The European Commission Report on the implementation of the Circular Economy
Action Plan932
The European Commission strategic long-term vision for a prosperous, modern,
competitive and climate neutral economy933
916 Available at: https://www.ilo.org/ilc/ILCSessions/previous-sessions/105/texts-adopted/WCMS_497555/lang--en/index.htm. 917 2019, available at: https://www.ilo.org/ilc/ILCSessions/108/reports/texts-adopted/WCMS_711674/lang--en/index.htm. 918 Available at: http://www.g20.utoronto.ca/2017/2017-G20-leaders-declaration.pdf. 919 Available at: http://www.g20.utoronto.ca/2017/170519-labour.html. 920 Available at: https://travail-emploi.gouv.fr/IMG/pdf/g7_social_communique_and_outcomes_final.pdf. 921 Available at: https://www.eesc.europa.eu/en/our-work/opinions-information-reports/opinions/next-steps-sustainable-
european-future. 922 Available at: http://www.europarl.europa.eu/doceo/document/TA-8-2017-0196_EN.html?redirect. 923 Available at: http://data.consilium.europa.eu/doc/document/ST-8833-2016-INIT/en/pdf. 924 European Commission, “Commission Staff Working Document on sustainable garment value chains through EU development
action”, SWD(2017) 147 final. 925 Directive 2012/29/EU of the European Parliament and of the Council of 25 October 2012 establishing minimum standards
on the rights, support and protection of victims of crime, and replacing Council Framework Decision 2001/220/JHA. 926 Available at: https://edoc.coe.int/en/fundamental-freedoms/7302-human-rights-and-business-recommendation-cmrec20163-of-the-committee-of-ministers-to-member-states.html. 927 Available at: http://www.pops.int/TheConvention/Overview/TextoftheConvention/tabid/2232/Default.aspx. 928Available at: https://ec.europa.eu/info/publications/180131-sustainable-finance-report_en. 929 Communication from the Commission to the European Parliament, the European Council, the Council, the European Central
Bank, the European Economic and Social Committee and the Committee of the Regions “Action Plan: Financing Sustainable
Growth”, COM/2018/097 final, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52018DC0097. 930 Available at: http://www.europarl.europa.eu/doceo/document/A-8-2018-0164_EN.html. 931 European Parliament Report on the proposal for a Regulation of the European Parliament and of the Council on the
alignment of reporting obligations in the field of environment policy and thereby amending Directives 86/278/EEC,
2002/49/EC, 2004/35/EC, 2007/2/EC, 2009/147/EC and 2010/63/EU, Regulations (EC) No 166/2006 and (EU) No 995/2010, and Council Regulations (EC) No 338/97 and (EC) No 2173/2005(COM(2018)0381 – C8-0244/2018 – 2018/0205(COD)), 15
October 2018, available at: http://www.europarl.europa.eu/doceo/document/A-8-2018-0324_EN.html. 932 Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and
the Committee of the Regions on the implementation of the Circular Economy Action Plan, COM(2019) 190 final,
http://ec.europa.eu/environment/circular-economy/pdf/report_implementation_circular_economy_action_plan.pdf. 933 Communication from the Commission to the European Parliament, the European Council, the Council, the European
Economic and Social Committee, the Committee of the Regions and the European Investment Bank “A Clean Planet for all: A
234
The EU Communication (2019) on Stepping up EU Action to Protect and Restore
the World’s Forests.934
3.3 Calls for mandatory due diligence at EU level based on legal and policy
background
It is also noted that recent observations about, or calls for, mandatory due diligence at
EU level have referred to the existing policy framework relating to its EU’s international
obligations, commitments and responsibilities. Some of these include:
In 2016, Members of Parliaments of eight Member States, prompted by Member
of the French Parliament Danielle Auroi, launched a "green card" initiative calling
for “duty of care legislation protecting individuals and communities whose human
rights and local environment are affected by the activity of EU-based companies”
at the EU level.935
In its Legal Opinion on improving access to remedy in the area of business and
human rights at the EU level, the EU Agency for Fundamental Rights also called
for “stronger legislative incentives” modelled on the French Law on the Duty of
Vigilance.936
In March 2019, the Responsible Business Conduct Working Group (RBC Group) of
the European Parliament presented its Shadow EU Action Plan on the
implementation of the UNGPs.937 The Shadow EU Action Plan recommended, as a
first step, for the Commission and the EEAS to come forward with an EU Action
Plan on the Implementation of the UNGPs.938 As part of its recommendations on
the implementation of Pillar I of the UNGPs, the Shadow EU Action Plan
mentioned the adoption of mandatory due diligence for EU businesses and
businesses operating within the EU which would require them to carry out human
rights due diligence regarding their operations, investments, business
relationships and supply chains. The Shadow Action Plan specifies that “due
diligence procedures need to take into account the specific risks and
differentiated impacts of business-related activities on women, youth and other
marginalised groups and communities”.939 It also provided, as part of its
recommendation on the implementation of Pillar III of the UNGPs, for the
adoption of legislation “establishing liability of companies for environmental or
human rights harm, based on the principle of reasonable care, including for
damage caused by companies under their control”.940 The Shadow EU Action Plan
stated that:941
It is urgent time for the EU, which is directly bound by its treaties to
promote and protect human rights globally, to take action. The EU is the
European strategic long-term vision for a prosperous, modern, competitive and climate neutral economy”, COM(2018) 773
final, 28 November 2018, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0773&from=en. 934 Communication from the Commission to the European Parliament, the Council, the European Economic and Social
Committee and the Committee of the Regions: Stepping up EU Action to Protect and Restore the World’s Forests, COM(2019)
352 final, 23 July 2019, available at: https://ec.europa.eu/info/sites/info/files/communication-eu-action-protect-restore-
forests_en.pdf. 935 ECCJ, “Members of 8 European Parliaments support duty of care legislation for EU corporations” (18 May 2016), available
at: http://corporatejustice.org/news/132-members-of-8-european-parliaments-support-duty-of-care-legislation-for-eu-
corporations. 936 FRA, “Improving Access to Remedy in the Area of Business and Human Rights at the EU Level” (10 April 2017), available at:
https://fra.europa.eu/sites/default/files/fra_uploads/fra-2017-opinion-01-2017-business-human-rights_en.pdf. 937 Responsible Business Conduct Working Group, “Shadow EU Action Plan on the Implementation of the UN Guiding Principles
on Business and Human Rights within the EU” (March 2019), available at: https://responsiblebusinessconduct.eu/wp/wp-
content/uploads/2019/03/SHADOW-EU-Action-Plan-on-Business-and-Human-Rights.pdf. 938 Ibid at 2. 939 Ibid at 6. 940 Ibid at 10. 941 Ibid at 1.
235
world’s largest economy, a trading hub with significant economic and
political power to influence the regulation of economic operations
worldwide. The EU and its member states are also increasingly subsidizing
European companies operating in developing and neighbouring countries.
It therefore carries a particular responsibility to prove leadership in the
promotion and protection of human rights against business-related human
rights abuses.942
In addition, recent trends have witnessed support for mandatory human rights due
diligence regulation at both national and EU level from certain large multinational
corporations. For instance, a number of companies joined the coalition campaign which
resulted in the Finnish Government committing to mandatory human rights legislation in
Finland,943 and the Swiss Association Groupement des Entreprises Multinationales
(representing over 90 companies) expressed its support for the Swiss legislative
(counter) proposal.944 In addition, several major chocolate companies have publicly
called for an EU level regulation on mandatory human rights due diligence.945
In relation to climate change, scholars have argued that:946
The EU continues to play the role of a leading global actor in the adoption of
innovative climate-related policy frameworks, some of which specifically concern
the link between business activities and climate change. In this respect,
significant developments in the EU regulatory framework have already taken
place, and more are to be expected in the future.
4. Intervention logic of a possible future EU intervention
Based on the Problem Analysis, the description of the legal basis and the policy
background of a possible EU intervention (as presented above), the following general
and specific objectives for a possible future EU intervention is suggested:
Proposed general objectives of a possible future EU intervention:
To promote adherence to international and EU human rights and environmental
obligations and commitments, including relating to climate change.
To mainstream sustainability as an essential guiding principle for all EU policies,
including with respect to corporate governance.947
To deliver on the Sustainable Development Goals (especially SDG 12) and the
Paris Agreement.
To foster a more long-term orientation in business.
Proposed specific objectives of a possible future EU intervention:
942 Ibid at 1. 943 Finnwatch, “Finnish Government commits to HRDD legislation” (3 June 2019), available at:
http://corporatejustice.org/news/15476-finnish-government-commits-to-hrdd-legislation. 944 Maude Bonvin, “Entreprises mises devant leurs responsabilités” (15 June 2018), available at:
https://www.gemonline.ch/uploads/_Files/documents_publics/Revue_de_presse/2018/2018.06.15_Agefi_Entreprises%20mise
s%20devant%20leurs%20responsabilites.pdf. 945 Fern, “Chocolate companies and MEPs call for EU Due Diligence Regulation” (10 April 2019), available at:
https://www.fern.org/news-resources/chocolate-companies-and-meps-call-for-eu-due-diligence-regulation-954/. 946 Chiara Macchi, “Climate Change, Business and Human Rights in the European Context: An Emerging Area of Legal Risk”,
draft paper presented at the conference “Justice for Transnational Human Rights Violations At the Crossroads of Litigation,
Policy and Scholarship”, Bonavero Institute of Human Rights (Oxford) on 19-20 June 2019 (on file with the author) at 2. See
also Charles F. Parker, Christer Karlsson and Mattias Hjerpe, “Assessing the European Union's global climate change
leadership: from Copenhagen to the Paris Agreement” (2017) 39:2 Journal of European Integration 239. 947 Terms of Reference (TOR) at 3; Commission Communication of November 2016 “Next steps for a sustainable European
future”.
236
To help prevent adverse human rights and environmental impacts in the context
of business activities.
To clarify companies’ due diligence obligations for human rights and the
environment, including climate change.
To foster more sustainable corporate governance.
To ensure that companies implement processes to carry out due diligence to
prevent human rights or environmental abuses or damage.
To avoid fragmentation of due diligence requirements across sectors of industry,
Member States and area of application.
To establish sanctions or liability for abuses that a company is involved in or
could have prevented.
To provide access to remedy for those affected by the adverse human rights or
environmental impacts of EU companies.
These proposed general and specific objectives of a possible future EU intervention also
take into account the description of the background of the study as described in the TOR
and the findings of the study.
Based on the problem analysis and the definition of objectives it is then possible to
elaborate the intervention logic of a possible future EU initiative. It considers the
underlying “theory” of the intervention (how it would be expected to work), as derived
from the analysis of the study. The following figure presents the proposed intervention
logic and shows how the identified problems and needs relate to the proposed general
and specific objectives, as well as to the expected inputs/activities, the intended outputs
and results, as well as the wider impacts.
Note that the intervention logic focuses on a comprehensive EU initiative, in line with
Option 4 presented below. If another option would be preferred, the intervention logic
would need to be adapted accordingly. For example, if no remedy was provided for those
affected, potential impacts in this respect could not be expected and would have to be
removed from the intervention logic.
237
Intervention logic of a possible EU intervention
238
239
5. Regulatory options
The regulatory options considered during this study, which will also form the basis of the
assessment of the regulatory options in the following section, are as follows:
Option 1: No policy change (baseline scenario)
Option 2: New voluntary guidelines / guidance
Option 3: New regulation requiring due diligence reporting
Option 4: New regulation requiring mandatory due diligence as a legal duty of care:
Sub-option 4.1: New regulation applying to a narrow category of business
(limited by sector);
Sub-option 4.2: New regulation applying horizontally across sectors:
Sub-option 4.2(a): applying only to a defined set of large companies;
Sub-option 4.2(b): applying to all business, including SMEs.
Sub-option 4.2(c): 4.2 (c) general duty applying to all business plus
specific additional obligations only applying to large companies
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory oversight and /
or enforcement mechanism:
Sub-option 4.3(a): mechanisms for judicial or non-judicial remedies;
Sub-option 4.3(b): state-based oversight body and sanction for non-
compliance.
5.1 No policy change (baseline scenario)
This option would entail no changes at all in regulation at EU level for companies on
undertaking due diligence through the supply chain. The existing regulatory position is
described in the Regulatory Review.
There is currently no general legal duty at EU level to require companies across all
sectors to exercise mandatory supply chain due diligence for their human rights and
environmental impacts.
The status quo is currently a mix of different legal obligations and standards which are
expected of companies. Some of these are legal, as set out in terms of regulation or case
law, and some are industry standards or “soft law”. Some of these due diligence standards
only apply within specific industries or sectors.
The scope and content of existing requirements for due diligence varies from jurisdiction
to jurisdiction. Some apply only with respect to certain human rights issues such as
modern slavery, forced labour, human trafficking or child labour, whilst others apply
across human rights and environmental issues. Some focus on different sectors or
commodities, such as timber or conflict minerals, whilst others are cross-sectoral.
These laws also contain different due diligence requirements. Some take the form of
legislation which requires reporting on due diligence (see Option 3 below), whereas the
French Duty of Vigilance Law and various legislative proposals that are currently pending
require companies to undertake mandatory due diligence in their operations and
throughout their supply chains (see Option 4 below). These laws vary with respect to the
scope of liability within the corporate group and supply chain, and in terms of providing
for right to civil remedy and enforcement mechanisms. Existing EU and domestic
regulation have also been introduced for the protection of the environment, some of
which are set out in Part IV Annexure C 3: Table of selected EU laws and voluntary
standards for environmental protection.
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Existing laws also vary in terms of their scope of application to different types of
companies. Some apply only to companies of a certain (large) size, based on turnover or
employee numbers, whilst others apply to companies regardless of size. Some
requirements are limited to companies domiciled in the regulating State whilst others
extend to companies which operate or carry out business in that State.
In a report for the Office of the UN High Commissioner for Human Rights, Jennifer Zerk
describes the current legal landscape as follows:948
[T]he present system of domestic law remedies is patchy, unpredictable, often
ineffective and fragile. It is failing victims who are unable in many cases to access
effective remedies for the abuses they have suffered. It is failing some States
because of the implications of current patterns of use of remedial mechanisms for
capacity-building and legal development. And it is failing many companies, which
are obliged to operate in an environment of great legal uncertainty and where
participants are not competing on anything approaching a level playing field with
respect to legal standards and levels of legal and commercial risk.
The current regulatory framework is discussed in full in the Regulatory Review section, but
the status quo may be summarised as follows:
The origin of the concept of due diligence for human rights (and environmental)
impacts is the UN Guiding Principles on Business and Human Rights (“the
UNGPs”). The UNGPs first introduced the concept of human rights due diligence
(“HRDD”) to as a way in which to “identify, prevent, mitigate and account for”949
actual or potential adverse human rights impacts a company may be involved in
through its own activities or business relationships.
Since the UNGPs, other international frameworks have incorporated expectations
on HRDD, including the OECD Guidelines for Multinational Enterprises,950 the ILO
Tripartite declaration of principles concerning multinational enterprises and social
policy (MNE Declaration, the OECD Guidance on Responsible Business Conduct,951
which applies to the supply chain, and OECD sectoral guidance on due diligence
for certain sectors,952 such as those related to conflict minerals,953 the agricultural
sector,954 the garment and footwear sector,955 and institutional investors.956 The
OECD Guidelines also require OECD Member States to establish National Contact
Points (“NCPs”), to which complaints may be submitted for companies’ failure to
meet the OECD standards, including their due diligence requirements.
The EU has instituted a number of initiatives imposing certain HRDD obligations,
such as, the EU Non-Financial Reporting Directive,957 the EU Timber Regulation,958
and the EU Conflict Minerals Regulation.959
948 Zerk, above n881 at 7. 949 Terms of Reference (TOR) at 3; Commission Communication of November 2016 “Next steps for a sustainable European
future”. 949 UNGP 15. 950 OECD, above n848. 951 The HRDD was incorporated into the OECD Guidelines as part of the 2011 revision. 952 OECD, above n848,, “Commentary on General Policies” at 21 para 14. 953 OECD, “Due Diligence Guidance for Responsible Supply Chain of Minerals from Conflict-Affected Areas” (2016). 954 OECD-FAO, “Guidance for Responsible Agricultural Supply Chains” (2016). 955 OECD, “Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector” (2017). 956 OECD, “Responsible Business Conduct for Institutional Investors: Key Considerations for due diligence under the OECD
Guidelines for MNEs” (2016). 957 EU Non-Financial Reporting Directive, above n900. 958 Regulation (EU) No 995/2010, above n862. 959 Regulation (EU) 2017/821, above n861.
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The 2017 French Duty of Vigilance law960 is the only legislative example to date which
imposes a general mandatory due diligence requirement for human rights and
environmental impacts. As this law is new, there are not yet any court decisions which
clarify how this law will be applied. However, during the course of this study, the first
litigations in terms of this law have been instituted.961 A Dutch Child Labour Due
Diligence Law was adopted during the course of this study. The Italian Legislative Decree
231/2001,962 provide for a defence from corporate criminal liability against certain
offences if the company can demonstrate that it adopted “models of organisation,
management and control” in order to identify, prevent and mitigate the risk of
commission of certain human rights and environmental violations.963
In Switzerland there are pending proposals for mandatory human rights due diligence
laws,964 and discussions relating to such laws are taking place in Finland, Germany965
and Norway.966 Campaigns for mandatory human rights due diligence laws have also
been launched in Austria, Belgium, Denmark, Finland, Germany, Luxembourg, the
Netherlands, Norway, Sweden and the UK.967
Some legislative measures require reporting requirements with respect to certain human
rights impacts only, particularly modern slavery and forced labour. Examples include the
UK Modern Slavery Act and the Australia Modern Slavery Act, which both succeeded the
2010 California Transparency in Supply Chains Act.968 Proposals for similar modern
slavery acts have been made in Hong Kong and New Zealand. In addition the Dutch
Child Labour Due Diligence Law that was passed in May 2019 focuses on issues of child
labour.969
Anti-corruption laws often require due diligence through the supply chain, and failure to
exercise this could be a criminal offence, also exposing individual directors to criminal
liability. For example, the US Foreign Corrupt Practices Act970 and the UK Bribery Act
2010 provide for due diligence as a defence to liability.
Apart from the French Duty of Vigilance Law, which is too new to have generated case
law to date (the first legal actions having just been instituted on that basis), there is
currently no direct cause of action to sue a company for human rights violations.
Claimants have pursued alternative avenues to bring such claims, including in terms of
tort law (often against parent companies for harms which took place through the
960 Law No. 2017-399 of March 27, 2017 on the “Duty of Vigilance of Parent Companies and Ordering Companies”. 961 See Regulatory Review, section 3.2.6 962 Decreto Legislativo 8 giugno 2001, n. 231, Disciplina della responsabilità amministrativa delle persone giuridiche, della
società e delle associazioni anche prive di personalità giuridica, a norma dell'articolo 11 della legge 29 settembre 2000, n. 300,
pubblicato nella Gazzetta Ufficiale n. 140 del 19 giugno 2001. See Regulatory Review and Italy Country Report. 963 FIDH, HRIC and ECCJ, "Italian Legislative Decree No. 231/2001: A model for Mandatory Human Rights Due Diligence
Legislations?", November 2019, available at: https://e6e968f2-1ede-4808-acd7-
cc626067cbc4.filesusr.com/ugd/6c779a_d800c52c15444d74a4ee398a3472f64c.pdf, at 10. 964 Swiss Coalition for Corporate Justice (“SCCJ”), “The Initiative Text with Explanations”, available at:
https://corporatejustice.ch/wp-content/uploads//2018/06/KVI_Factsheet_5_E.pdf; SCCJ, “How does the parliamentary
counter-proposal differ from the popular initiative (RBI)?”, May 2018, available at: https://corporatejustice.ch/wp-content/uploads/2018/07/Comparision_RBI_counter-proposal_EN-1.pdf. 965 Business and Human Rights Resource Centre (“BHRRC“), “German Development Ministry drafts law on mandatory human
rights due diligence for German companies”, available at: https://www.business-humanrights.org/en/german-development-
ministry-drafts-law-on-mandatory-human-rights-due-diligence-for-german-companies. It is noted that the German Federal
Government recently issued a statement stressing that the document merely constitutes "internal considerations“ within the
German Federal Ministry for Industrial Cooperation and Development ("BMZ"), https://www.bundestag.de/presse/hib/670510-
670510. See also Manfred Shäfers “Regiering droht mit einem Lieferkettengesetz”, Frankfurter Allgemeine, 11 December
2019; Caspar Dohmen, “Minister arbeiten an Lieferkettengesetz”, Süddeutsche Zeitung, 11 December 2019. 966 Report from the Ethics Information Committee, appointed by the Norwegian government on June 1, 2018. Report delivered
on November 28, 2019. Draft translation from Norwegian of sections of Part I. Available at: https://www.business-humanrights.org/sites/default/files/documents/Norway%20Draft%20Transparency%20Act%20-%20draft%20translation_0.pdf 967 BHRRC, “National Movements for Mandatory Human Rights Due Diligence in European Countries”, available at:
https://www.business-humanrights.org/en/national-movements-for-mandatory-human-rights-due-diligence-in-european-
countries. 968 California Transparency in Supply Chains Act of 2010. 969 The Netherlands Child Labour Due Diligence Act 2019. 970 US Foreign Corrupt Practices Act 15 USCs78dd-1 (1977).
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activities of a foreign subsidiary), and consumer protection laws. Some legal claims are
being instituted based on individual defendant companies’ role in climate change.971 This
is an area which is new and developing.
In the absence of EU regulation on due diligence, it is expected that:
Domestic legal frameworks will increasingly introduce mandatory due diligence
requirements for human rights and environmental due diligence. They are likely
to follow the concept of due diligence as described in the UNGPs, but may differ in
terms of application of scope, implementation, and enforcement.
This will take place both within EU Member States as well as elsewhere. For
example, in France the Duty of Vigilance Law is already in force. Similar proposals
have been made in Germany, Finland, Belgium, as well as the UK and
Switzerland. (In the Netherlands, the Dutch Child Labour Due Diligence Law was
passed in May 2019).972 Acts which require reporting on due diligence for modern
slavery have taken effect in the UK and Australia, and have been proposed in
Hong Kong and New Zealand.
Some EU Member States are unlikely to introduce due diligence measures, which
will lead to a patchwork of due diligence expectations across the EU.
Victims will still continue to face a lack of access to remedies, apart from in those
countries where mandatory due diligence measures is introduced and rights to
civil remedies are thereby created.
At EU level, existing and anticipated due diligence requirements applicable only to
certain sectors or issues, such as the EU Timber Regulation, the EU Conflict
Minerals Regulation, the EU General Data Protection Regulation, and the proposed
EU Regulation on disclosures relating to sustainable investments and
sustainability risks.973
This will continue to lead to a situation where companies are subject to such
requirements and others are excluded. Increasingly, the same company may be covered
by more than one of these requirements at EU and/or Member State level.
5.2 New voluntary guidelines/guidance (Option 2)
This option would entail new voluntary guidelines at EU level for companies on
undertaking due diligence through the supply chain. Voluntary guidelines are by their
nature not usually legally enforceable. However, they may influence the standard
required under specific circumstances or in specific industries, which in turn may be
taken into account in civil claims, such as in tort law or contracts.
971 BHRRC, above n804 at 1. 972 The Netherlands Child Labour Due Diligence Act 2019. 973 European Parliament legislative resolution of 18 April 2019 on the proposal for a regulation of the European Parliament and
of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU)
2016/2341, Article 3gamma, entitled “Transparency of adverse sustainability impacts at entity level”, provides in particular
that:
1. Financial market participants shall publish and maintain on their websites either of the following: a) where they
consider principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with
respect to these principal adverse impacts, taking due account of their size, nature and scale of their activities and the types of
their financial products; b) where they do not consider adverse impacts of investment decisions on sustainability factors, clear reasons for not doing so, and, where relevant, including information as to whether and when they intend to consider such
adverse impacts. 2. Information provided in accordance with point (a) of the paragraph 1 shall include at least the following:
a) information on policies on the identification and prioritisation of principal adverse sustainability impacts and indicators;
b) a description of the principal adverse sustainability impacts and of the actions taken and, where relevant, planned; c) brief
summaries of engagement policies in accordance with Article 3g of Directive 2007/36/EC, where applicable; d) reference to
the adherence to responsible business conduct codes and internationally recognised standards for due diligence and reporting
and, where relevant, the degree of alignment with the long-term global warming targets of the Paris Climate Agreement.
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Examples of influential guidelines which already exist in this context include the UN
Guiding Principles on Business and Human Rights, and the OECD Guidelines for
Multinational Enterprises. These guidelines have been followed by various others,
including a wealth of industry guidance.
As highlighted above, various voluntary guidelines already exist relating to due diligence
for human rights and environmental impacts of business. These guidelines, in particular
the UNGPs, the OECD Guidelines and certain industry standards, have been shown in our
surveys and interviews to be influential and informs the way in which companies think
about their due diligence. These guidelines have been followed by various others,
including a wealth of industry guidance.
It has been observed both by stakeholders in our study as well as external
commentators, that the limitations of voluntary guidelines lie in the fact that they are
soft law instruments, and as such do not give rise to legally binding obligations.974 As a
result, despite the influence of the UNGPs, the actual implementation of due diligence
obligations for human rights and environmental impacts by businesses has been very
poor in practice.
For example, in 2018, the Corporate Human Rights Benchmark assessment of 101 of the
world largest publicly traded companies across three industries (agricultural products,
apparel and extractives) found that a majority of companies scored poorly on the
Benchmark, with 40% of companies scoring no points at all across the due diligence
section of the assessment.975 According to the report, “this should provide food for
thought for governments considering the role of legislation in business and human rights
and should also serve as a wake-up call for businesses and investors everywhere”.976
Another example can be provided by the cocoa sector for which a report from Mighty
Earth revealed that a year after the pledge of the world's largest chocolate and cocoa
companies, the sourcing of cocoa linked to deforestation continued, and that “big
companies as well as the governments of Côte d’Ivoire and Ghana hold responsibility for
this continued – but avoidable – destruction”:977
While some companies and local authorities have taken actions to limit
deforestation, and some areas saw improvements, we nonetheless documented
that farmers who engaged in deforestation for cocoa were still able to openly sell
their cocoa without repercussions. Farmers we caught openly clearing forest for
cocoa told us that they did not face sanctions, discontinued supply chains, or even warnings from the buyers in Cargill’s and other companies’ supply chains.
Another recent report noted that:978
There have been many voluntary initiatives to tackle these problems. The use of
certification schemes for cocoa is more common than for most agricultural
commodities, a new International Organisation for Standardisation (ISO)
standard for sustainable cocoa has been published, and many companies have
their own programmes. Organisations and initiatives have been set up to tackle
974 See Section 2 Market Practices. 975 CHRB, “2018 Key Finding - Apparel, Agricultural Products and Extractives Companies”, available at:
https://www.corporatebenchmark.org/sites/default/files/documents/CHRBKeyFindings2018.pdf at 5 and 13. 976 Ibid at 5. 977 Etelle Higonnet, Glenn Hurowitz, Abdul Tejan Cole, Alex Amstrong and Liviya James, “Behind the Wrapper: Greenwashing in
the Chocolate Industry”, Mighty Earth (December 2018), available at: http://www.mightyearth.org/wp-
content/uploads/Chocolate-Report_english_FOR-WEB.pdf. 978 Report for Fern, Tropenbos International and Fairtrade, authored by Duncan Brack, ”Towards sustainable cocoa supply
chains: Regulatory options for the EU” (June 2019), available at: https://www.fern.org/news-resources/towards-sustainable-
cocoa-supply-chains-regulatory-options-for-the-eu-1978/.
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child labour and deforestation, and a number of EU Member States have
announced programmes to address the sustainability of the cocoa sector.
There is increasing acknowledgement, however, that while these current
initiatives have had some positive impacts, they have not succeeded, and are not
likely to succeed, in tackling low prices and poverty, child labour, deforestation
and illegality across the whole cocoa sector.
Similarly, in the garment sector, a recent report showed that voluntary initiatives are
failing to deliver living wage.979 The report assessed 32 leading brands (from luxury,
sportswear, fast fashion and online retail sectors) and found that, whilst 84% of brands
had made some sort of commitment to wages being enough to meet worker's basic
needs, very few were actually following through on this commitment in any measurable
way, and none could yet give evidence showing that any worker in their supply chains
are being paid a living wage.
In its resolution on the EU flagship initiative on the garment sector, the European
Parliament noted:
[H]ow the existing voluntary initiatives for the sustainability of the garment
sector’s global supply chain have fallen short of effectively addressing human
rights and labour rights-related issues in the sector; calls on the Commission,
therefore, to go beyond the presentation of a Staff Working Document and to
propose binding legislation on due diligence obligations for supply chains in the
garment sector.980
In relation to deforestation, a recent report from ClientEarth and Global Witness noted
that:981
Not one of the 500 main companies and financial institutions in forest-risk supply
chains is on track to eliminate commodity-driven deforestation from their supply
chains and portfolios by 2020. Yet, nearly half have made commitments to do so
by 2020 or earlier.
In relation to climate change, a recent report of the Special Rapporteur on extreme
poverty and human rights warned against an overreliance on voluntary, private sector
efforts:982
There is little doubt that companies will play a role in providing and implementing
solutions to climate change, but an overreliance on voluntary, private sector
efforts would be a mistake. Climate change is a market failure, and voluntary
emissions reduction commitments will only go so far. As of May 2019, 554
companies had committed to reductions in greenhouse gas emissions as a part of
the ‘Science Based Target Initiative’, but the initiative is essentially toothless and
relies entirely on self-reporting.
The report further adds that:983
[I]t is clear that corporate actors cannot and will not, of their own accord, be
capable of promoting a comprehensive approach that ensures the sort of
979 Labour Behind the Label, “Tailored Wages UK 2019: The state of pay in the global garment industry”, available at:
http://labourbehindthelabel.org/tailoredwagesuk2019/. 980 European Parliament resolution of 27 April 2017 on the EU flagship initiative on the garment sector (2016:2140(INI)). 981 ClientEarth and Global Witness, above n 814 at 5. 982 UN Human Rights Council, “Report of the Special Rapporteur on extreme poverty and human rights: Climate change and
poverty”, A/HRC/41/39 (17 July 2019) at para 48. 983 Ibid at 69.
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economic and social transformation that climate change mitigation demands.
Through the actions of the fossil-fuel industry in particular, and highly successful
corporate lobbying to downplay or ignore climate change in many countries, the
private sector has demonstrated its inability to take any sort of leadership role in
climate change mitigation. This is true even though companies and major
investment funds are now acutely aware of the upheavals on the horizon. The
result is that governments, individually and collectively, need to take
responsibility for implementing a comprehensive transformative program aimed
at mitigation.984
The UNGPs call on States to consider "a smart mix of measures” at national and
international level, combining mandatory and voluntary measures, to foster business
respect for human rights.985
5.3 New regulation requiring due diligence reporting (Option 3)
This option would entail new regulation at EU level requiring companies to report publicly
on the steps they have taken to identify, address, prevent and mitigate any adverse
human rights and environmental impacts in their own operations or of third-party
business relationships (including in the supply chain).
Reporting requirements do not in themselves require a substantive due diligence
standard. Where they are enforceable, enforcement usually relates to the adequacy of
the frequency or content of the report, rather than whether the processes which were
reported meet a certain standard. Reporting requirements do not usually provide
remedies to those affected.
Regulation which requires due diligence reporting already exists at EU level in the form
of the EU Non-financial Reporting Directive. Another prominent example of a reporting
requirement on due diligence referenced by several stakeholders is the UK Modern
Slavery Act.
Many of the reporting requirements discussed in this study do not impose an effective
sanction for the failure to report. Examples include the UK Modern Slavery Act, which
was mentioned by several stakeholders across the EU as a model of this type of
reporting regulation. Where corporate compliance of these kind of reporting
requirements are evaluated, the focus tends to be on whether a report has been
provided, rather than on the content and veracity of the report.986
However, more recent reporting requirements do envision enforcement of reporting
requirements. For example, the EU Non-Financial Reporting Directive states:987
Member States should ensure that effective national procedures are in place to
enforce compliance with the obligations laid down by this Directive, and that
those procedures are available to all persons and legal entities having a
legitimate interest, in accordance with national law, in ensuring that the
provisions of this Directive are respected.
However, this enforcement would relate to compliance with the reporting requirement:
whether a report was produced, whether it was adequate to meet the criteria of the
984 Ibid at 18. 985 Commentary to UNGP 3. 986 Bhumann, above n830 at 29. 987 EU Non-Financial Reporting Directive, above n900 at para 10 of the Preamble.
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reporting requirement, and whether it was accurate.988 For example, the EU NFRD
states:989
Statutory auditors and audit firms should only check that the non-financial
statement or the separate report has been provided. In addition, it should be
possible for Member States to require that the information included in the non-
financial statement or in the separate report be verified by an independent
assurance services provider.
In accordance with this, the EU NFRD provides:990
Member States shall ensure that the statutory auditor or audit firm checks
whether the non-financial statement referred to in paragraph 1 or the separate
report referred to in paragraph 4 has been provided.
…
Member States may require that the information in the non-financial statement
referred to in paragraph 1 or in the separate report referred to in paragraph 4 be
verified by an independent assurance services provider. [Our emphasis]
The reporting requirement does not in itself constitute a duty to undertake due diligence.
Therefore, even where there is oversight of the frequency, detail and veracity of the
report, as set out above, this is still not an enquiry into whether the company undertook
the due diligence which was reasonably required under the circumstances. Reporting
requirements in themselves generally do not provide for legal liability for a failure to
meet a standard of care, regardless of whether harms are reported, or failed to be
reported.
In addition, reporting requirements provide no access to remedy for those who have
been affected by the harms. In other words, even when reporting requirements are
enforced, and information contained in reports verified, the existence or absence of a
compliant report will not provide those affected with a remedy.
Moreover, reporting requirements, even when they expressly apply to harms external to
the company, are by their nature focused on the provision of information relating to the
“material risks” for the performance of the company.991
Concerns have been raised about the effectiveness of reporting requirements. A recent
report for the Netherlands government on responsible business conduct found that the
assumption that companies will be eager to comply with reporting regulation due to
988 For example see the UK Country Report: “[T]he Financial Conduct Authority has the power to impose large fines on listed
companies that fail to publish information likely to have a significant effect on the price of financial instruments (e.g. shares)
on a timely basis. Although no fines levied by the Financial Conduct Authority to date concern non-disclosure of information
relating to a company’s involvement in human rights issues, it follows that human rights issues which lead to losses or the
impairment of assets (e.g. where community or labour protests halt production or operations) this would need to be publicly
disclosed. The Financial Conduct Authority can also impose fines on listed companies which fail to comply with the Disclosure Guidance and Transparency Rules when making statutory filings; e.g. the requirement to describe the company’s ’principal
risks and uncertainties’…” [References omitted here, see UK Country Report]. 989 Para 16 of the Preamble of the EU NFRD. 990 Art 19a (5) and (6) of the EU NFRD. 991 For example see the UK Country Report: “Complaints lodged by an NGO with the Financial Conduct Authority and the
Financial Reporting Council in 2018 against certain listed companies for alleged failures to set out and particularise climate
change related risks in their statutory filings may set an interesting precedent for similar human rights focussed complaints.
This kind of activism may lead directors to apply greater attention to the identification and management of potential human
rights issues by companies, although to some extent this may depend on the complainants successfully showing that specific
human rights issues (e.g. labour welfare issues in the supply chain) are a material concern for shareholders (evidenced by shareholder resolutions, for example). Whilst directors are obliged under section 172 of the Companies Act 2006 to have
regard to employees, the community and the environment in carrying out their functions, this is ultimately within the context
of a broader fiduciary duty to promote the success of the company for the benefit of the members as a whole. In other words,
the company’s (and shareholders’) interests have primacy. However, recognising that the more severe human rights issues
can have ’reputational, financial or legal’ repercussions, a failure to carry out human rights due diligence (which is appropriate
given the business’s operating context and relevant severe human rights risks) may mean a company’s directors are poorly
positioned to report on material risks to the company”. [References omitted here; see UK country report]
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pressure faced from civil society, consumers and investors is "not confirmed by
evaluative research".992
For example, in relation to the California Act, a 2015 Report finding found that only 15%
of companies required to report under the Act were fully compliant.993 In relation to the UK
Modern Slavery Act, the Home Offices estimates that 40% of companies covered by the
legislation have failed to publish a statement.994 The Independent Review of the UK
Modern Slavery Act concluded that, despite the Act’s contribution to raising awareness of
slavery and human trafficking in supply chains, the impact of the legislation has been
limited to date.995 The report states:996
[E]vidence gathered by our Expert Advisers shows that there is a general
agreement between businesses and civil society that a lack of enforcement and
penalties, as well as confusion surrounding reporting obligations, are core reasons
for poor-quality statements and the estimated lack of compliance.
The Business and Human Rights Resource Centre has tracked and assessed the
transparency statements of the largest companies in the UK (FTSE 100) since the
adoption of the UK Modern Slavery Act. In its 2018 report, it found that the legislation
"has failed to deliver the transformational change many hoped for". In particular, the
report highlighted that:
[T]hree years on, most companies still publish generic statements committing to
fight modern slavery, without explaining how. Sadly, only a handful of leading
companies have demonstrated a genuine effort in their reporting to identify and
mitigate risks.997
Similar conclusions have been drawn in relations to the limited impact of the EU Non-
Financial Directive. The 2018 Alliance for Corporate Transparency analysed the
implementation of the EU Non-Financial Reporting Directive in the reports of 105
companies from three sectors (information and communication technologies, healthcare,
and energy and resource extraction).998 The report examined the description of policies
and due diligence processes, outcomes, principal risks (including with respect to
business relationships) and key performance indicators (KPls) and to examine if the
disclosed information was specific enough to allow understanding of the companies'
impact and strategy.999 The report found that, if over 90% of companies express
commitment to respect human rights, only 36% describe their due diligence
processes.1000 According to the report, a majority of companies do not provide any
information that would allow a stakeholder to understand how their commitment to
respect human rights is put into practice:1001
The vast majority of companies acknowledge in their reports the importance of
environmental and social issues for their business. However, in only 50% of cases
for environmental matters and less than 40% for social and anti-corruption
992 PWC, above n 830 at 59. 993 Development International, “Corporate Compliance with the California Transparency in Supply Chains Act of 2010” (2 November
2015). See also https://www.theguardian.com/sustainable-business/2016/jan/22/california-anti-slavery-law-development-
international-sun-maid-asia-human-trafficking. 994 UK Home Office, “Home Office tells business: open up on modern slavery or face further action” (18 October 2018),
available at: https://www.gov.uk/government/news/home-office-tells-business-open-up-on-modern-slavery-or-face-further-
action. 995 Field, Miller and Butler-Sloss, above n830. 996 Business & Human Rights Resource Centre, "FTSE 100 & the UK Modern Slavery Act: From Disclosure to Action", available
at: https://www.business-humanrights.org/sites/default/files/FTSE%20100%20Briefing%202018.pdf. 997 Ibid at 8. 998Alliance for Corporate Transparency Project, "2018 Research Project: The state of corporate sustainability disclosure under
the EU Non-Financial Reporting Directive", available at:
http://www.allianceforcorporatetransparency.org/assets/2018_Research_Report_Alliance_Corporate_Transparency-
66d0af6a05f153119e7cffe6df2f11b094affe9aaf4b13ae14db04e395c54a84.pdf at 7. 999 Ibid. 1000 Ibid at 6. 1001 Ibid at 8.
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matters, this information is clear in terms of concrete issues, targets and principal
risks.
The general information that most companies provide does not allow readers to
understand their impacts and by extension their development, performance and
position, as required by the NFR Directive.
The report further stated that:
With respect to climate change, the biggest gaps in the current practice are the
lack of reporting by companies in the Energy and Resource Extraction sector on
both short and long time horizons and the transition to a below 2°C scenario,
which are mentioned by 26% and 21% of companies respectively.
Also, Karin Buhmann has noted, in relation to the EU Non-Financial Reporting Directive,
that, the operative articles of the Directive predominantly focus on ex-post measures,
neglecting ex-ante organisational and proactive due diligence necessary to prevent the
human rights and environmental harm from taking place in the first place.1002
In another example, although the UK Modern Act makes provision for the Secretary of
State to seek an injunction when a company fails to issue the statement,1003 this has not
been used in practice and there have so far been no penalties for non-compliance.1004
Like with the California Act, issues of non-compliance have been reported to be
widespread with the UK Modern Slavery Act.1005 The UK Modern Slavery Act was
independently reviewed during 2019 and it was noted that:1006
While it has contributed to greater awareness of modern slavery in companies’
supply chains, a number of companies are approaching their obligations as a
mere tick-box exercise, and it is estimated around 40 per cent of eligible
companies are not complying with the legislation at all.
The review made recommendations for stronger provisions to ensure compliance and
improve the quality of modern slavery statements produced by eligible companies.1007 In
particular, the review stated that:1008
Stakeholders were clear that the lack of clarity, guidance, monitoring and
enforcement in modern slavery statements needed to be addressed to increase
compliance and quality. We agree and recommend that companies should not be
able to state they have taken no steps to address modern slavery in their supply
chains, as the legislation currently permits, and that the six areas of reporting
currently recommended in guidance should be made mandatory. We also
recommend that Government should set up a central repository for statements;
that the Independent Anti-Slavery Commissioner should monitor transparency;
sanctions for non-compliance should be strengthened; and that Government
should bring forward proposals for an enforcement body to enforce sanctions
against non-compliant companies. A requirement for greater transparency from
business is becoming usual practice, with businesses required to report on a
number of issues, including for example their gender pay gap. It is only right that
reporting on modern slavery should be taken equally seriously.
1002 Bhumann, above n830 at 38. 1003 UK Modern Slavery Act 2015 (UK MSA), s.54(11). 1004 Field, Miller and Butler-Sloss, above n839 at para 15. 1005 NYU Stern Center for Business and Human Rights, above n837 at 5. 1006 Field, Miller and Butler-Sloss, above n839 at para 15. 1007 Ibid at para 16. 1008 Ibid at para 17.
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Virginia Mantouvalou discusses the approach of the UK Modern Slavery Act. Although
this Act provides for criminal sanctions for domestic offences of slavery, the
transparency provision which requires reporting about due diligence in the supply chain
does not provide for a sanction:1009
In contrast to the criminalisation of modern slavery found in the early sections of
the MSA, when it comes to business conduct we find a soft law provision. The
MSA did not attempt to pierce the corporate veil with hard legal rules and
sanctions for non-compliant businesses. Instead, it included section 54, entitled
‘Transparency in Supply Chains etc’, which imposes a duty on businesses to have
transparency in their supply chains with respect to slavery and human trafficking.
Mantouvalou continues about the reporting requirements of the UK Modern Slavery
Act:1010
There are shortcomings both in the design of the system under section 54 and its
implementation. At a general level, it is questionable whether self-regulation
alone is the best way to deal with business misconduct. The role of reflexive law
in labour law has been questioned in scholarship, especially where workers’
human rights are in issue. Particularly in relation to the regulation of business
conduct, selfregulation has been criticised for simply protecting businesses from
reputational damage and for limiting their liability, and has been shown through
empirical research to be ineffective unless combined with strong public
institutions and laws.
Genevieve LeBaron and Andreas Rühmkorf undertook a study which compares how
companies implement the UK Modern Slavery Act to how companies implemented the UK
Bribery Act (which provides for state-based oversight and enforcement, including
criminal sanctions.) They write:1011
That the Modern Slavery Act fails to establish new public labour standards or
enforcement mechanisms is significant, given the differences we observe between
company policies and practices on bribery and forced labour. While stringent
legislation appears to strengthen private governance, such as by spurring lead
firms to use their contractual bargaining power and implementation of due
diligence based procedures, less stringent legislation does not appear to spur
change in company practices. This variation is understandable, given that the
Bribery Act model provides an incentive for companies to avoid sanctions by
implementing adequate due diligence procedures, while the Modern Slavery Act
does not impose additional requirements (except in regards to reporting) and
carries no sanction for non-compliance. Within the Modern Slavery Act, the
substitution of a vague reporting requirement over a more stringent model of
public governance appears to have undermined its effectiveness in ‘steering’
corporate behaviour. Although it is possible that company strategy could still
evolve, we are sceptical that this legislation will result in meaningful changes to
company and supplier policies on forced labour, given the shortcomings we have
documented in its institutional design.
As a result of these limitations, the recent above-mentioned report for the Netherlands
government on responsible business conduct recommends that "new instruments and
1009 Virginia Mantouvalou, “The UK Modern Slavery Act 2015 Three Years On” (2018) 81:6 The Modern Law Review 1017 at
1038. 1010 Ibid at 1040. 1011 LeBaron and Rühmkorf, above n830 at 26.
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strategies should encourage, promote and enforce the implementation or all steps of the
due diligence cycle, as opposed to focusing solely on reporting".1012
However, it has been argued that reporting laws have played a role in raising awareness
internally within companies about human rights and environmental due diligence.1013
Those laws that require Board members to sign off have in particular been said to drive
internal conversations about the company’s due diligence for its impacts.1014 Moreover,
as these laws are fairly new, company laws relating to corporate reporting generally may
increasingly be used by corporate regulators to enforce non-financial reporting
requirements.
5.4 New regulation requiring mandatory due diligence (Option 4)
A mandatory due diligence requirement at EU level would require companies to carry out
due diligence to identify, prevent, mitigate and account for actual or potential human rights
and environmental impacts in its own operations or supply chain.
The due diligence process is understood as an ongoing, context-specific process which
includes the following components:
1) Identifying and assessing actual and potential impacts
2) Integrating and acting upon the findings
3) Tracking the effectiveness of these actions, and
4) Communicating how impacts are addressed, including through reporting.
In line with the UNGPs, the OECD Guidelines and the ILO MNE declaration, the due
diligence process should include meaningful consultation and collaboration with
potentially affected and other relevant stakeholders (including civil society organisations,
workers' organisations, and investors) along the value chain.
This duty would require companies to meet a certain standard of care of due diligence for
the human rights and environmental impacts in their own operations and supply chains (or
value chains).
In accordance with legal understanding of due diligence, this standard of care would allow
for a company to demonstrate, in its defence, that it has met this standard by undertaking
the required level of due diligence.
The terminology of the standard could take different forms. For example:
The duty could be phrased as, for example, a duty to exercise due diligence of care,
a duty of vigilance or a duty to prevent human rights and environmental harms.
The required level of due diligence which the company would need to demonstrate
in its defence to escape liability could be phrased as, for example, adequate due
diligence, appropriate due diligence, or reasonable due diligence.
This duty to exercise due diligence as a standard of care could be incorporated in company
law, but would be context-based (similar to a tort standard) in that it would require the due
diligence which is “due” or required in the specific circumstances.1015 Factors which would
be determinative in deciding whether the diligence met this standard would include:
1012 PWC, above n830 at 61. 1013 For example, see Landau, above n865. 1014 See Section 2 Market Practices. 1015 Nicolas Bueno writes about the Swiss Popular Initiative: "Concretely, the introduction of a mandatory due diligence
provision objectifies the expected conduct that Switzerland-based companies must apply with a view to preventing adverse
human rights and environmental impacts in Switzerland and abroad. In this regard, the text of the initiative does not
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The severity1016 or significance1017 of the impact
The size of the company
The sector
The operational context
The ownership and structure of the company
The resources of the company
The standards and practices applicable within the industry (including any sector-
specific guidance on due diligence)
The level of leverage which the company has, and whether this was exercised.
For the above determination it will be relevant what the company knew or ought to have
known under the circumstances.
The due diligence duty of care is focused on the risks external to the company, i.e. the risks
to people or the planet. In this way, due diligence as a corporate standard of care differs
from fiduciary duties which director owe to the company, in that the duty does not (only)
relate to risks that are material to the company or in the company’s interest to address.
The due diligence duty of care relates to external human rights and environmental harms
which the company is causing, to which it is contributing or directly linked, regardless of
whether it is in the company’s (short or long-term) interest to consider these risks:1018
Human rights due diligence can be included within broader enterprise risk
management systems, provided that it goes beyond simply identifying and
managing material risks to the company itself, to include risks to rights-holders.
In accordance with the concept of due diligence, this defence would also allow for
prioritisation of some risks over others. The concept of due diligence as described in the
UNGPs and other standards is based on the acknowledgement that companies do not have
unlimited resources and may therefore need to prioritise those risks which they identify as
the most “severe”,1019 the “most significant”,1020 or the most “salient”1021 (terminology used
by the UNGPs Reporting Framework).1022 Severity is defined with reference to the scale,
scope and irremediable character of the impact. The assessment and determination of
severity would need to be proved by the company in order to justify its prioritisation.1023
distinguish between the three scenarios presented above: causing an adverse impact, contributing to an adverse impact
through the enterprise’s own activities, and adverse impacts directly linked to the enterprise’s operations by a business relationship. It broadly states that due diligence ‘duties apply to controlled companies as well as to all business relationships’.
However, according to the explanation of the initiative text, section (2)(b) introduces a mandatory due diligence provision
based on the UNGP and the OECD Guidelines for Multinational Enterprises. Therefore, the international framework may provide
guidance on how to interpret the text of the initiative. Although not expressly referenced in the text, this standard of conduct
should help to identify whether a company has committed a fault and should be held liable for its own actions and omissions
on the basis of the general tort of negligence.” Nicolas Bueno, “The Swiss Popular Initiative on Responsible Business: From
Responsibility to Liability”, in Liesbeth Enneking et al (eds.), Accountability, International Business Operations, and the
Law, London: Routledge (2020), 239. 1016 UNGP 17(b) which states that human rights due diligence “will vary in complexity with the size of the business enterprise, the risk of severe human rights impacts, and the nature and context of its operations”. 1017 OECD, above n848, Chapter II, Commentary, para 16: “Where enterprises have large numbers of suppliers, they are
encouraged to identify general areas where the risk of adverse impacts is most significant and, based on this risk assessment,
prioritise suppliers for due diligence.” 1018 Commentary to UNGP 17. 1019 Above n 1016. 1020 OECD, above n848, Chapter II, Commentary, para 16: “Where enterprises have large numbers of suppliers, they are
encouraged to identify general areas where the risk of adverse impacts is most significant and, based on this risk assessment,
prioritise suppliers for due diligence.” 1021 UN Guiding Principles Reporting Framework with implementation guidance, available at: https://www.ungpreporting.org/wp-content/uploads/UNGPReportingFramework_withguidance2017.pdf at 22, which defines
salient human rights issues at “those human rights that are at risk of the most severe negative impact through its activities of
business relationships”. 1022 UN Guiding Principles Reporting Framework, available at: https://www.ungpreporting.org/wp-
content/uploads/UNGPReportingFramework_2017.pdf. 1023 It is also noted that these terms and the prioritisation principle seem to be firmly understood, as they were mentioned in
the Market Practices section by stakeholders across the spectrum.
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The duty would be a substantive legal duty rather than a procedural requirement. The
enquiry into whether the standard of care was met would take into account all of the
following:
Which processes or steps were put in place
Whether these steps were adequate / reasonable / appropriate in the particular
circumstances, taking into account the relevant context and the risks (including
what the company ought to have known)
Whether the process was implemented; and
How it was implemented in practice.
In this way, a company will not be able to defend itself by simply “ticking the boxes” or
undertaking a process which is titled as “due diligence”, in line with the UNGPs which make
clear that the conducting due diligence should not be an automatic defence.1024 The enquiry
will go further to evaluate whether these steps met the standard which were required in the
particular circumstances. In our interviews and in the survey, stakeholders have expressed
strong support for this wide and general understanding of due diligence, and indicated that
this is essential in order for the same general standard to be applicable to all companies, in
all sectors, in all circumstances. The open-ended nature of the standard allows it to be
applicable into the finest detail, on the facts of a specific case, and also taking into account
the relevant industry standards and factual circumstances of what the company has been
doing about the issue.
The UN Human Rights Council noted that the exercise of human rights due diligence
could be a basis for a possible defence to liability in some cases. The UN Human Rights
Council added that:1025
The equitability and rights-compatibility of permitting such a defence will depend
on many factors, including what kind of harm was involved, the connection of a
company to the harm, victims’ alternative avenues to remedy, and the State’s
regulatory aims.
The UN Human Rights Council concluded that:1026
Permitting a defense to liability based upon human rights due diligence activities
could incentivize companies to meaningfully engage in such activities and have
important preventative effects…
The report noted, however, that a due diligence defence would lead to concerns of
“inappropriateness and unfairness” if it would allow for “business enterprises seeking to
raise due diligence defenses in cases where superficial “check box” approaches to human
rights due diligence might be used as a reference point instead of genuine attempts to
identify, mitigate, and address human rights risks as contemplated in the UNGPs.” The
report highlighted “the importance of ensuring that judges are familiar with the content
of the UNGPs as it relates to human rights due diligence so they can distinguish genuine
efforts by business enterprises to identify and address risks from superficial efforts, and
make their decisions accordingly.”1027 This point ties in with the discussion below on non-
binding guidance which could accompany the regulation to inform judges, companies,
regulators, communities and other stakeholders of the details relating to its
implementation.
1024 Commentary to UNGP 17. 1025 UN Human Rights Council, above n850 at para 25. 1026 Ibid at para 29. 1027 Ibid at para 29.
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Given the importance of this option in terms of the mandate of this study, we have
subdivided this regulatory option into three sub-options:
Sub-option 4.1: New regulation applying to a narrow category of business (limited
by sector)
Sub-option 4.2: New regulation applying horizontally across sectors
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory oversight and
enforcement mechanism.
They are elaborated in the following.
Sub-option 4.1: New regulation applying to a narrow category of
business (limited by sector)
This sub-option would entail a substantive legal duty to meet a standard of due diligence,
as described above, but it would only apply to a narrow category of business, for example,
a certain sector or commodity. Some sectoral due diligence requirements already exist,
including the above-mentioned EU-level requirements in the timber, agriculture and conflict
minerals context. However these require a hybrid of reporting and substantive action, and
do not offer remedies for victims. For example:
The EU timber regulation (EUTR)1028 requires operators to exercise due diligence
throughout the supply chain in order to ensure that they are not placing illegally harvested
timber and products derived from such timber on the EU market. Competent authorities
nominated by EU Member States1029 are responsible for enforcing the Regulation and
setting the penalties in case of non-compliance.
The 2016 Report on the first two years of implementation of the EUTR revealed that the
Regulation had had some positive effects, notably in terms of raising awareness of the
problem of illegal logging amongst EU consumers,1030 and added “significant value to the
international efforts to halt deforestation and forest degradation, conserve biodiversity and
address climate change”.1031 The report also noted that EU operators were gradually taking
steps to ensure the legality of their suppliers. In particular, the report noted in relation to
the exercise of due diligence [DD] by operators that:1032
Operators across the EU have not consistently implemented the DD requirements
during the first two years of application of the Regulation. Although evidence shows that
the situation is gradually improving, the overall compliance by the private sector
remains uneven and insufficient.
The report further stated that:1033
Although the uptake of the DD obligation has been slow, there is evidence that
operators are gradually implementing DD, demanding more information and legality
assurance from their suppliers. This demonstrates that the DD obligation has the
potential to change market behaviours of operators, thus creating supply chains free of
illegally harvested timber. However, more time is needed before a definitive
assessment can be made.
1028 Regulation (EU) No 995/2010, above n862. 1029 The list of Nominated Competent Authorities can be found here: http://ec.europa.eu/environment/forests/pdf/list_competent_authorities_eutr.pdf. 1030 Report from the Commission to the European Parliament and the Council, Regulation (EU) No 995/2010 of the European
Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber
products on the market (the EU Timber Regulation), COM(2016) 74 final, at para 5.4. 1031 Ibid at para 5.1. 1032 Ibid at para 5.4. 1033 Ibid at para 5.4.
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It was further found that uneven implementation and patchy enforcement did not help
establish a level playing field and more effort was needed from both the Member States
and the private sector to ensure its effective and efficient application.1034
The 2017 Report on the implementation of the EUTR noted that clear progress had been
made and that the number of checks made and sanctions applied for violations of the EUTR
had significantly increased.1035 However, the report also underlined that “continuous efforts
are needed to ensure a uniform and effective application of the EUTR across countries”
since “uneven implementation can have potential implications in terms of both the
effectiveness of legislation and a level playing field for market operators”.1036
The EU conflict minerals regulation1037 requires EU-based companies that import four
minerals - tin, tantalum, tungsten and gold - from conflict-affected and high-risk areas into
the EU to exercise due diligence by checking that what they buy is sourced responsibly and
does not contribute to conflict or other related illegal activities. Each Member State is
tasked to designate one or more competent authorities responsible for the oversight of the
Regulation.1038 In case of non-compliance, Member State competent authorities shall issue
a notice of remedial action to be taken by a Union importer. However, the regulation does
not provide for penalties in the case of non-compliance with a notice of remedial action.1039
The regulation will enter into force on 1 January 2021.
It is noted that due to the mandate of this study, which is focused broadly on human
rights and environmental due diligence within the sustainability agenda, the regulatory
options considered do not focus on issue-specific regulation such as those particular
to modern slavery or child labour. It may nevertheless be helpful to note that similar
concerns apply to regulation which is limited in scope to specific issues as to limitation
by size. It has been argued that one of the unintended effects of the approach focusing
on one single issue, such as modern slavery, child labour or conflict minerals, is that it
detracts the attention from other types of impacts or other serious breaches of human
rights.1040
This disincentivizes broader due diligence as it “creates a strong driver for
businesses to prioritise efforts to address that particular issue, even if, objectively, it
would not qualify as one of the salient human rights risks facing the organisation".1041
Also, due to the various examples of existing issue-specific regulation, and in order to
inform a broad understanding of survey perceptions of current and possible future
regulation mechanisms, survey respondents were nevertheless asked about issue-
specific regulation. As evidenced in the Market Practices section, the majority of
stakeholders indicated a preference for a due diligence regulation which would apply
across “all EU-recognised human rights and environmental impacts”.1042
Sub-option 4.2: New regulation applying horizontally across sectors
This regulatory option would apply the above-mentioned duty to carry out due diligence as
a standard of care to companies operating in all sectors. We discuss this option with respect
to three sub-options, namely as applicable only to large companies, applicable to all
1034 Ibid at para 7. 1035 Report from the Commission to the European Parliament and the Council, Regulation (EU) No 995/2010 of the European
Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber
products on the market (the EU Timber Regulation), COM(2018) 669, at para 7. 1036 Ibid at para 7. 1037 Regulation (EU) 2017/821, above n861. 1038 Ibid Article 10. 1039 See SOMO, “European Commission urged to implement regulation on ‘conflict minerals’ properly” (26 April 2019), available
at: https://www.somo.nl/european-commission-urged-to-implement-regulation-on-conflict-minerals-properly/. 1040 Landau, above n 865. 1041 GBI and Clifford Chance, "Business and Human Rights: Navigating a Changing Legal Landscape" (2019), available at:
https://www.cliffordchance.com/briefings/2019/03/business_and_humanrightsnavigatingachangin.html. 1042 See in this regard Market Practices section.
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companies regardless of size, including SMEs, and a general duty applicable to companies
of all sizes plus additional obligations for large companies.
Sub-option 4.2(a): applying only to a defined set of large companies:
This would entail a general legal duty to undertake due diligence, as described above, but
would only apply to a certain defined set of large companies. Most of the laws discussed
above only apply to certain large companies, defined either by turnover or number of
employees. For example, the French Duty of Vigilance Law applies to French companies
employing over 5000 in France (through their direct and indirect subsidiaries), or
employing over 10 000 employees worldwide (through their direct or indirect subsidiaries).
The UK Modern Slavery Act applies based on turnover. The Swiss counter-proposal
excludes SMEs (unless they are operating in high risks sectors), as it applies to companies
exceeding two of the following three thresholds: a balance sheet total of 40 million
CHF/USD; a turnover of 80 million CHF/US, or 500 full-time employees.1043 The EU non-
financial reporting Directive applies to large public interest companies which employ more
than 500 employees.1044
Sub-option 4.2(b): applying to all business, including SMEs
This would entail a legal duty to undertake due diligence, as described above, and it would
apply to all companies, including SMEs. As discussed above, the UK Anti-Bribery Act applies
to all companies including SMEs. A study by the UK government found that two thirds
(66%) of SMEs had knowledge of the Bribery Act and its legal liability implications, and
that “perceived knowledge and understanding was greatest among those SMEs that were
aware of corporate liability for failure to prevent bribery (79%) compared to those that
had only heard of the Act itself (45%)”.1045
The French Law on the Duty of Vigilance applies to a specific set of large companies only,
thereby excluding SMEs. The Swiss legislative counter-proposal also applies to large
companies and excludes SMEs, except those SMEs that operate in high risk sectors.1046 If
the proposal were to become law, high risk sectors are to be defined on a regular basis by
the government.
The initial text of the Swiss Popular Initiative on Responsible Business applied to all Swiss-
based companies, although it acknowledged that the needs of small and medium-sized
companies that have limited risks of this kind are to be taken into account.1047 The
Dutch Child Labour Due Diligence Law also applies to all companies, and even extends to
non Dutch-based companies supplying goods into the Netherlands.1048
In this respect, the Interpretive Guide to the Corporate Responsibility to respect human
rights notes that:1049
1043 Swiss Coalition for Corporate Justice, “How does the parliamentary counter-proposal differ from the popular initiative (RBI)“, available at: https://corporatejustice.ch/wp-content/uploads/2018/07/Comparision_RBI_counter-proposal_EN-1.pdf. 1044 It is estimated to cover approximately 6,000 large companies and groups across the EU, including listed companies, banks,
insurance companies and other companies designated by national authorities as public-interest entities. See
https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/non-financial-
reporting_en. 1045 HM Government, ”Insight into awareness and impact of the Bribery Act 2010: Among small and medium sized enterprises
(SMEs)” (2015), available at:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/440661/insight-into-
awareness-and-impact-of-the-bribery-act-2010.pdf. 1046 In the current counter-proposal the Swiss government will periodically define which sectors are deemed to be “high risk”. This is potentially inconsistent with the UNGPs’ understanding of due diligence, in that human rights risks are not sector-
specific and all companies (even SMEs) need to decide for themselves whether their activities are high risk. 1047 Swiss Coalition for Corporate Justice, ”The Initiative Text with Explanations” https://corporatejustice.ch/wp-
content/uploads//2018/06/KVI_Factsheet_5_E.pdf. 1048 The Netherlands Child Labour Due Diligence Act 2019. 1049 United Nations Office of the High Commissioner for Human Rights, “The Corporate Responsibility to Respect Human Rights:
An Interpretive Guide” (2012) at 20.
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In many instances, the approaches needed to embed respect for human rights in
a smaller enterprise’s operations can mirror the lesser complexity of its
operations. However, size is never the only factor in determining the nature and
scale of the processes necessary for an enterprise to manage its human rights
risks. The severity of its actual and potential human rights impact will be the
more significant factor. For instance, a small company of fewer than 10 staff that
trades minerals or metals from an area characterized by conflict and human
rights abuses linked to mining has a very high human rights risk profile. Its
policies and processes for ensuring that it is not involved in such abuses will need to be proportionate to that risk.
Recent civil society calls for mandatory human rights and environmental due diligence at
EU level also expressly add a call for such regulation to apply to financiers and investors
“who wield a huge amount of power in facilitating projects that can have large
environmental and human rights impacts”.1050 In addition, they argue that it should apply
to the public sector. In this respect, it is worth noting that the UK has issued a consultation
on extending section 54 of the UK Modern Slavery Act to include the public sector.1051
Sub-option 4.2(c): general duty applying to all business plus specific additional
obligations only applying to large companies
This sub-option was introduced by agreement with the Commission after the empirical
research phase of the study had already closed, and so was not presented to stakeholders
in this exact format.
It is a “mixed” option which enables a combination of obligations which are applicable to
companies of all sizes with specific additional obligations only for large companies.
This sub-option is discussed with reference to one particular example of how this sub-
option could be applied, namely “a general due diligence duty applying to all business,
including SMEs, plus a specific obligation linked to Paris agreement aligned targets for
specific large companies.” This report contains a discussion of this sub-option specifically
and exclusively with reference to the above example of how such a sub-option may be
conceived with reference to the Paris Agreement.
The late introduction of this example of obligations linked to the Paris agreement on climate
change was thought to be justified based on recent developments during early to mid-
2019. These developments clarified ways in which the due diligence expected of individual
companies could be utilised for due diligence for climate change impacts.
In particular, recent developments which justify the late inclusion of this sub-option are:
The finding by the OECD National Contact Point in the Netherlands that a company’s
due diligence should include the setting of targets and measurable objectives for
climate change, even in the absence of agreed international standards for such
measurements.1052
The August 2019 ruling, by the Polish District Court of Poznán, that the decision of
the Polish energy company Enea to authorise construction of a coal power plant
1050 ClientEarth and Global Witness, above n 814 at 3. 1051 James Butler, “Government is proposing to extend the Modern Slavery Act to the public sector. Let's help them make it
easy to do by supporting the consultation” (12 July 2019), available at: https://party.coop/2019/07/12/extending-modern-
slavery-act-to-the-public-sector/. 1052 The Netherlands National Contact Point for the OECD Guidelines for Multinational Enterprises, Oxfam Novib, Greenpeace
Netherlands, BankTrack and Friends of the Earth Netherlands (Milieudefensie) versus ING, Final Statement, 19 April 2019,
available at: https://www.oecdguidelines.nl/documents/publication/2019/04/19/ncp-final-statement-4-ngos-vs-ing.
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was legally invalid by reason of the unjustifiable financial (climate-related) risks
to their shareholders.1053
The publication of the EU Non-Binding Guidelines on corporate climate-related
information reporting,1054 which accompanies the EU non-financial reporting
directive on the issue of climate change reporting.
In terms of this sub-option, it is noted that a general duty of due diligence applicable to all
companies including SMEs would already include a duty to identify, assess, address,
monitor and communicate on actions taken by the company with respect to its impacts on
climate change. However, the “additional” requirements referred to in this sub-option would
be applicable to all relevant large companies, regardless of their specific climate change
risks.
Although the Paris Agreement does not set out specific due diligence requirements for
companies, the above-mentioned statement of the Dutch NCP in the ING case1055 is
indicative of how this duty could be applied with reference to the due diligence
requirements of the OECD Guidelines. In accordance with the findings of the NCP, any such
“additional” measures could entail requirements relating to target-setting, measuring, and
reporting relating to such actions.
In this respect, it is also noted that the proposed EU Regulation on disclosures relating to
sustainable investments and sustainability risks would require financial market participants
to report on information with:1056
[R]eference to the adherence to responsible business conduct codes and
internationally recognised standards for due diligence and reporting and, where
relevant, the degree of alignment with the long-term global warming targets of the
Paris Climate Agreement. [Our emphasis]
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory
oversight and enforcement mechanism
As noted throughout the report, many stakeholders have highlighted the importance of
having robust enforcement mechanisms in place in order to ensure compliance with the
regulation and thereby foster its effectiveness. These sub-options consider the legal
implication of a failure to comply with either sub-option 1 or 2, and the possible liability and
enforcement that might ensue.
Sub-option 4.3(a): mechanisms for judicial or non-judicial remedies
This option would provide for those affected by the company’s failure to exercise due
diligence to have access to judicial and/or non-judicial remedies. Some examples of
remedies include the following:
Remedies as financial compensation for the harm suffered
Remedies as a restoration to the position before the harm took place, such as an
order to clean up environmental damage.
1053 ClientEarth, “Court win in world-first climate risk case puts future of Ostrołęka C coal plant in question” (2019), available at: https://www.clientearth.org/press/court-win-world-first-climate-case-ostroleka-c-future-in-question/. 1054 European Commission, “Guidelines on reporting climate-related information”, available at: https://www.eticanews.it/wp-
content/uploads/2019/06/190618-climate-related-information-reporting-guidelines_en-1.pdf. See also:
https://europa.eu/rapid/press-release_IP-19-3034_en.htm. 1055 The Netherlands National Contact Point for the OECD Guidelines for Multinational Enterprises, above n1052. 1056 Proposed EU Regulation on disclosures relating to sustainable investments and sustainability risks, above n973, Art
3gamma 2(d).
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Remedies as pecuniary damages, which are a way of quantifying the harm suffered
in monetary terms.
Preventative remedies could include injunctions or interdicts to force the company
to cease with ongoing or potentially harmful conduct.
In climate change actions, remedies could be compensation calculated as a
percentage of the company’s contribution to the damage.1057
In the human rights context, remedies can often be very innovative (such as an apology),
but they need to be a remedy for the victim.
It is noted that a corporate fine which goes to the public purse and not to the victim
therefore does not constitute a remedy. The UNGPs expect companies to remedy the
adverse impacts which they cause or to which they contribute, but not those to which they
are directly linked – which may, depending on the level of control they have over suppliers,
include certain sections of the supply chain. To date, the French Duty of Vigilance law is the
only example in this area which provides for a civil right of action in case the non-
compliance with the due diligence requirements gave rise to a damage. People affected by
the company’s failure to implement a vigilance place are able to sue the company for
compensatory damages.
A recent report for the European Parliament highlighted that an EU level legislation on
mandatory due diligence with a civil liability element attached to it, modelled on the
French law, would help improve access to justice for victims of corporate human rights
abuses in third countries.1058
Sub-option 4.3(b): state-based oversight body and sanction for non-compliance
Oversight and enforcement bodies (often called administrative bodies) can be created at EU
or Member State level. Oversight bodies could be established within existing state
departments (such as the Departments of Justice and Trade) or new bodies could be
created (such as the statutorily-created Modern Slavery Commissioners in the UK and
Australia).
Where regulation is introduced in company law, the relevant oversight body could be the
same entity responsible for the oversight of traditional corporate law requirements, such as
those relating to the filing of annual reports, audits and number of directors. Where
criminal mechanisms are introduced, oversight may take place by existing or newly created
law enforcement bodies at domestic level.
Enforcement mechanisms could include fines, the appointment of monitors, withdrawal of
licences or trade concessions, or even the dissolution of the company. At national level,
state-based enforcement may include criminal sanctions, including prison sentences for
individuals (such as directors or compliance officers). For example, the anti-bribery
legislation (UK Bribery Act and US FCPA) discussed above is enforced through state-based
oversight mechanisms. They provide for fines for the company, as well as individual
criminal liability for the directors. The German draft outline for a suggested mandatory
human rights and environmental due diligence law which has been discussed amongst
stakeholders would also be enforced through state-based oversight mechanisms.
1057 For instance, in the civil proceedings brought in Germany against RWE, the claimant, a Peruvian farmer, argued that RWE,
as one of the world's top emitters of greenhouse gases, was partly responsible for the flooding risk to his house as it
significantly contributed to global greenhouse gas emissions, and thus to climate change and that the company should
therefore contribute its share (proportional to its historic CO2 emissions) to the cost of protecting the claimant's house and the
village of Huaraz from the risk of flooding due to the melting of two glaciers into a lake. At the moment of writing, the case is
pending. For more information on the case, see Marx, Bright and Wouters, above n826 at 73. 1058 Marx, Bright and Wouters, ibid.
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Depending on what kind of body receives the oversight mandate, this sub-option could
presumably have significant resource implications for the state.1059 The supervision and
enforcement of a due diligence requirement by the state would probably go very
substantially beyond the current expertise, resources and legal mandate of national
authorities responsible for supervising and enforcing corporate reporting requirements.
Given the scope of what would need to be overseen, adequate resourcing of such an
oversight body could be challenging. However, oversight mechanisms and state-based
enforcement mechanisms have been found to be effective even where they are criticised
for lacking enough resources and bringing very few prosecutions, such as the UK Anti-
Bribery Act.1060
However, it is noted that despite potentially being more effective to change corporate
behaviour, a sanction and a fine, or even a prison sentence or a dissolution of the
company, does not constitute a remedy for the victim.
Enforcement through company law
As set out above, the legal basis for the regulatory intervention would relate to the
regulation of corporate behaviour, and would therefore be most suitable within company
law.
Companies are statutory creations which would not exist if it were not for their creation
through company law provisions. Corporate law by definition is a body of law which
regulates corporate behaviour. A regulation which creates corporate duties relating to the
management of harms caused by corporate behaviour is therefore best placed within the
framework of corporate law.
This approach is similarly reflected in the framework set out in the mandate documents, in
that current and proposed regulation at national level also regulate these duties
in commercial codes or civil codes. For example, the French Duty of Vigilance Law
introduced two new articles (Articles L. 225-102-4 and L. 225-102-5) into the French
Commercial Code. The Swiss counter-proposal seeks to introduce several articles in the
Swiss Code of Obligations, the Swiss Civil Code and the Swiss Private International Law
Act.
However, it should also be noted that the duty to be created would be a corporate duty for
the company as a whole, rather than duties for individual directors. Where directors have
fiduciary duties, they are usually only enforceable by the company or the shareholders, and
not by external parties or stakeholders. The position is explained in the Netherlands
country report as follows:1061
It should be noted that even if a duty could be said to exist under certain
circumstances for directors (or supervisory directors) of Dutch companies to take
the interests of ‘external’ stakeholders in the IRBC-context into account, Dutch
company law does not provide them with enforcement mechanisms to hold (officers
of) the corporation liable for any damage suffered as a result of its operations. This
also explains why there is no case law in the field of Dutch company law that
specifically deals with irresponsible business conduct in global value chains. In
1059 See Assessment of Options section below on the potential impacts on public authorities. 1060 LeBaron and Rühmkorf, above n 830 at 15. 1061 The Netherlands country report further adds: “One case that may be mentioned here is the 1979 Batco case, which involved inquiry proceedings into the affairs of the company Batco Nederland, following a dispute between the company and
the labour unions over the company’s decision to close one of its factories. The Enterprise Division of the Amsterdam Court of
Appeal came to the conclusion that there had been mismanagement by Batco in this respect, since the company had
contravened elementary principles of responsible entrepreneurship by failing to properly take into account the factory workers’
interests. One of the court’s considerations was that while the company had expressly accepted the OECD Guidelines for
Multinational Enterprises as a guideline for its policies in these matters, it had failed to live up to its responsibility under those
guidelines to consult with the unions and the works council.”
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theory, inquiry proceedings (the Dutch enquêteprocedure) could provide an option
for ‘external’ intervention in order to address serious and ongoing violations of
human rights or environmental standards that occur as part of the international
business activities of Dutch companies (and/or their subsidiaries). These
proceedings may also be instituted in the general interest by for example trade
unions or the Advocate General at the Dutch Supreme Court. However, there are no
examples to date of such proceedings being applied in the IRBC-context.
In any event, the creation of a corporate duty of due diligence would indirectly create
fiduciary duties for the directors, who would need to ensure compliance with this duty in
the interest of the company (but which duty is owed to the company i.e. the
shareholders only). This legal duty would apply regardless of whether the individual
director, company or shareholders apply an "enlightened" understanding of what is
“material” or “in the company's interest”. The same duty would apply to directors
whether they believe sustainability issues to be in the company's long-term interest or
not.
6. Due diligence as a legal standard of care: Clarification of a few common questions
During the course of the study, it became evident that it would be helpful to clarify1062 a
few common questions regarding due diligence as a legal standard of care (also referred to
as a duty of care) within the context of human rights and environmental harms. This
appeared particularly important in light of the limited number and relatively recent due
diligence requirements of the nature considered in this study, as well as the various
terminologies used in the legal systems set out in the country reports.
The following overview1063 summarises the nature of due diligence as a legal standard or
duty of care within the context of human rights and environmental harms. It is considered
in more detail elsewhere in this study, including in the Country Reports, stakeholder views
in Market Practices, and the discussion of Regulatory Options. This overview is guided by
questions from or clarifications made by stakeholders and experts during the study.
Due diligence as a legal standard of care is based on the basic tort law or negligence
principle - phrased differently but similar in nature across civil and common law
jurisdictions - being that a person should take reasonable care not to cause harm to
another person.1064 This ties in with the description by John Ruggie, main author of the UN
Guiding Principles on Business and Human Rights (“UNGPs”),1065 of due diligence as a “do
no harm” requirement.1066 The OHCHR description of due diligence is helpful:1067
1062 This is in accordance with EU Better Regulation Tool #17 Section V. 1063 This section is included in the full report in the section Problem Analysis and Regulatory Options under the subheading
“Due Diligence as a Legal Standard of Care: Clarification of a Few Common Questions”. 1064 See for example Cees van Dam, “Tort Law and Human Rights: Brothers in Arms: On the Role of Tort Law in the Area of
Business and Human Rights” (2011) 2 JETL 221. 1065 UN Office of the High Commissioner for Human Rights “Guiding Principles on Business and Human Rights: Implementing
the “Protect, Respect and Remedy’ Framework”, HR/PUB/11/04, 2011, available at:
https://www.ohchr.org/documents/publications/GuidingprinciplesBusinesshr_eN.pdf. 1066 Ruggie summarises the corporate responsibility to respect as “put simply, to do no harm”. UN Human Rights Council,
“Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations
and other business enterprises: ‘Protect, Respect and Remedy: a Framework for Business and Human Rights’”, A/HRC/8/5 (7
April 2008), at para 24; UN Human Rights Council, “Report of the Special Representative of the Secretary-General on the issue
of human rights and transnational corporations and other business enterprises: Clarifying the Concepts of ‘Sphere of Influence
and Complicity’”, A/HRC/8/16 (15 May 2008), at para 3. 1067 Office of the UN High Commissioner for Human Rights, The Corporate Responsibility to Respect Human Rights:
An Interpretive Guide (2012) at 4.
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Such a measure of prudence, activity, or assiduity, as is properly to be expected
from, and ordinarily exercised by, a reasonable and prudent [person or enterprise]
under the particular circumstances; not measured by any absolute standard, but
depending on the relative facts of the special case. In the context of the Guiding
Principles, human rights due diligence comprises an ongoing management process
that a reasonable and prudent enterprise needs to undertake, in light of its
circumstances (including sector, operating context, size and similar factors) to meet
its responsibility to respect human rights.
As a legal standard of care, the level of due diligence expected therefore depends on the
relevant circumstances in which the company operates, and is both a process and an
approach. Due diligence looks at how the company identifies, assesses and addresses
human and environmental impacts of the company’s activities.
Due diligence in our context is generally considered to be a continuous and ongoing process
comprised of four stages:1068
1. Identification and assessment of actual and potential impacts that company may
cause or contribute to through its own activities, or which may be directly linked to
its operations, products or services by its business relationships;
2. Acting upon the findings of that assessment and integrating its findings about its
impacts into decision making;
3. Tracking the company’s efforts to address its impacts, to ensure they these actions
effective
4. Communicating how the company is addressing its impacts.
These stages are circular in that they operate as part of a continuous process.
The first steps which a company is expected to take are based on identification and risk
assessment. This starts with identifying and assessing the risk of harm to those affected by
the company and then the consequent risk to the company. It does not commence with the
risk to the company. To identify the risk of harm requires a full risk assessment.
Once that full assessment has occurred and is reviewed at senior level, the company can
create and act on its policies in this area. It can also then determine its priorities in dealing
with the risk as part of its due diligence process. Those priorities must not be set in
advance, or some serious risks will be missed, and these risks will vary from company to
company, and over time. The focus is on dealing with serious or salient risks first. Salient
issues are those that are at risk of the most severe negative impacts through a company’s
activities or business relationships. The salient issues can best be discerned after the
assessment of the company’s impacts undertaken, so that material risks are not
predetermined.
Due diligence then requires a company to ensure that it tracks its actions and policies in
response to this risk assessment. This must be right to the operational level and into its
supply and value chain. It needs to report back on this tracking and then communicate
both internally and externally about it.
These risks will depend from one company to the next. Due diligence is useful for the
regulation of corporate conduct, as it does not require the regulator to attempt to do the
company’s impact assessments for them. Regulators cannot realistically list every single
circumstance, or combination of circumstances, which could possibly apply to companies on
1068 As defined in the Terms of Reference (“TOR”), mandate materials and UNGP 17.
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a daily basis in different parts of their global operations. Instead, regulators use due
diligence as a legal standard of care to expect the company to assess its own risks and
address them in accordance with the standard of care. If the company exercises reasonable
or adequate due diligence, it meets the standard. If it does not, for example because it
overlooked certain risks factors which it should have taken into account, then it does not
meet the standard.
With due diligence as a legal standard of care, the regulator sends the message that
society requires companies to take full responsibility for their own harmful impacts, and
that failure to do so attracts legal liability.
In some instances, the company operates in a high risk sector or country. If so, the
company must take these additional risk factors into account, including the legal and social
environment. Due diligence expressly does not automatically expect companies operating
in high risk contexts to leave, and does not intend to penalise those companies which
operate in certain countries or sectors. Indeed, it has been well-demonstrated that there
are no countries or sectors which pose no risks at all to people, the environment or the
planet.
Due diligence expects companies to assess for themselves their risks, prevent such risks
from taking place, and mitigate any damages which have already occurred. The occurrence
of a harm suggest that the company would be liable, unless it could show that it has done
everything that could have been reasonable expected in the circumstances. In this way, the
due diligence standard incentivises effective, high quality and practical due diligence
processes which target real risks and priorities.
There is a distinction between due diligence as a legal standard or duty of care and due
diligence as a procedural requirement. Where the first sets out the general duty of “do no
harm”, the second could be viewed as adding a procedural requirement of taking proactive
and demonstrable steps. For example, the proposal for mandatory due diligence in
Switzerland and the draft law in Germany are understood to require due diligence as a legal
standard or duty of care, whereas the French Duty of Vigilance Law has an additional
component of publishing a vigilance plan. It is not clear that in terms of liability anything
would turn on this distinction, as in both cases the breach of the duty would be triggered if
the due diligence requirement was not met and a damage resulted (or could result) from
the breach.
In addition, both these forms of mandatory due diligence (as a legal standard of care, or
requirement) can be distinguished from a duty to prevent certain harms (such as set out in
the UK Bribery Act). A duty to exercise due diligence is breached when the company fails to
exercise the required standard of due diligence (or where the company fails to put in place
a due diligence process, if there is a procedural requirement). In contrast, the duty to
prevent is breached if the company fails to prevent the harm. As demonstrated by the UK
examples of duty to prevent laws (for failing to prevent bribery1069 and failing to prevent
tax evasion1070 respectively), these laws create strict (or “no fault”) liability, and would
ordinarily need to accompanied by a statutory defence of due diligence, so as to ensure
that they do not create an absolute liability with no defence.
With both mandatory due diligence and the duty to prevent model, there is the ability for
claimants to take preventative legal action for harms which have not yet occurred. Where
the duty is framed with reference to due diligence for actual or potential harms, it would be
possible for claimants to bring a preventative claim on the basis that the company is failing
to meet the standard of due diligence required for actual or potential harms. Preventative
1069 Section 7 of the UK Bribery Act 2010. 1070 Sections 45(2) and 46(3) of the UK Criminal Finances Act 2017.
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relief may include injunctive relief such as a court ordering the company to improve its due
diligence and pay interim damages. An example of a law which provides for this
preventative relief for potential future harms is the French Duty of Vigilance Law. Similarly,
any state-based oversight body could investigate and sanction a failure to meet the
standard regardless of whether a harm already took place, or may occur unless the process
is improved.
In addition, with a mandatory due diligence duty which is overseen and enforced by the
state or independent oversight body, the regulator could also review and take action
against a company’s process even where no claimant has alleged an actual or potential
harm. This review would still evaluate the adequacy or appropriateness of the company’s
due diligence steps with reference to the context and the possible harm which could arise
from the company’s failure to exercise its duty of care, but the oversight could be triggered
by the regulator itself, even in the absence of any claimants.
Another key feature of due diligence as a standard of care as highlighted by stakeholders
and experts is that it should not be construed as a “tick-box” exercise. For example, the EU
Timber Regulation1071 and the EU Conflict Minerals Regulation1072 both recognise that
certain third party verification schemes could be used as part of the risk assessment
process. However, these verifications are not described as replacing the due diligence
requirements, which place the risk assessment duty on each individual company
(“operator”) regardless of whether they have acquired formal certification. For instance, the
Commission Implementing Regulation on the Timber Regulation specifies that certain
certification or other third-party verified schemes may be taken into account in the risk
assessment and risk mitigation procedures,1073 but does not provide that such verification
tools can be used “on [their] own to evidence compliance with the Timber Regulation”.1074
1071 Recital 19 of the EU Timber Regulation, EU Regulation No 995/2010 of the European Parliament and of the Council laying
down the obligations of operators who place timber and timber products on the market, provides: ”In order to recognise good
practice in the forestry sector, certification or other third party verified schemes that include verification of compliance with
applicable legislation may be used in the risk assessment procedure.” [Our emphasis]. See also Articles 4 and 6, including
6(1)(b) which requires: “(b) risk assessment procedures enabling the operator to analyse and evaluate the risk of illegally
harvested timber or timber products derived from such timber being placed on the market. Such procedures shall take into
account the information set out in point (a) as well as relevant risk assessment criteria, including: - assurance of compliance
with applicable legislation, which may include certification or other third-party- verified schemes which cover compliance with
applicable legislation, - prevalence of illegal harvesting of specific tree species, - prevalence of illegal harvesting or practices in
the country of harvest and/or sub-national region where the timber was harvested, including consideration of the prevalence of
armed conflict, - sanctions imposed by the UN Security Council or the Council of the European Union on timber imports or
exports, - complexity of the supply chain of timber and timber products.” [Our emphasis] 1072 Recital 14 of the EU Conflict Minerals Regulation, EU Proposal for a Regulation of the European Parliament and of the
Council setting up a Union system for supply chain due diligence self-certification of responsible importers of tin, tantalum and
tungsten, their ores, and gold originating in conflict-affected and high-risk areas, COM/2014/0111 final - 2014/0059 (COD),
provides: “Union importers retain individual responsibility to comply with the due diligence obligations set out in this
Regulation. However, many existing and future supply chain due diligence schemes (‘due diligence schemes’) could
contribute to achieving the aims of this Regulation…Such schemes use independent third-party audits to certify smelters and
refiners that have systems in place to ensure the responsible sourcing of minerals. It should be possible to recognise those
schemes in the Union system for supply chain due diligence (‘Union system’). The methodology and criteria for such schemes
to be recognised as equivalent to the requirements of this Regulation should be established in a delegated act to allow for
compliance with this Regulation by individual economic operators that are members of those schemes and to avoid double
auditing. Such schemes should incorporate the overarching due diligence principles, ensure that requirements are aligned to
the specific recommendations of the OECD Due Diligence Guidance and meet the procedural requirements such as
stakeholders' engagement, grievance mechanisms and responsiveness.” [Our emphasis] 1073 Article 4 of the EU Commission Implementing Regulation No 607/2012 of 6 July 2012 on the detailed rules concerning the due
diligence system and the frequency and nature of the checks on monitoring organisations as provided for in Regulation (EU) No
995/2010 of the European Parliament and of the Council laying down the obligations of operators who place timber and timber
products on the market. 1074 ClientEarth and Global Witness, “Strengthening Corporate Responsibility: The case for mandatory due diligence in the EU
to protect people and the planet”, 8 August 2019, available at: https://www.documents.clientearth.org/wp-
content/uploads/library/2019-07-23-strenghtening-corporate-responsibility-the-case-for-mandatory-diligence-in-the-eu-to-
protect-people-and-the-planet-coll-en.pdf at 14.
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In other words, the legislation does not itself provide for such certifications to operate as
"exempting"1075 companies from their due diligence duties.
These provisions of the EU Timber Regulation were interpreted and applied in the German
Administrative Court in Cologne. The Court found against a German company which
sourced timber from a supplier in DRC, on the basis that the company should have
recognised that the certificate produced by the supplier was fake. As the defendant
company failed to recognise this, they were found not to have met the due diligence
requirement, which the Court emphasised is “not merely a purely formal requirement”.1076
The Court also referred to the seriousness of these requirements in light of the role which
illegal logging plays in climate change.1077
In this way, the provisions of the EU Timber Regulation which require due diligence (or in
this case risk assessment) extends wider than a mere "tick-box" of formalities, to a realistic
consideration of all the risk factors applicable in the circumstances.
This understanding of due diligence aligns with other examples of how due diligence as a
legal standard of care is applied in the case law. Such due diligence enquiries typically ask
not only about the formalities of the process but whether it was adequate in the
circumstances, and whether it was followed in reality. The simple fact of having a so-called
"due diligence" process in place does not automatically show that the standard of care was
met. For example, in the case of Eric Barizaa Dooh of Goi and others v Royal Dutch Shell,
the Court of Appeal of The Hague described the following factual enquiry of not only the
process but its adequacy and implementation in the circumstances:1078
The assertion by Shell that the parent company did not know about the spillage and
the condition and maintenance of the pipeline locally does not seem to be an
adequate defence in all cases, particularly not if sabotage ceases to be a cause of
damage. Considering, inter alia, (i) that Shell sets itself goals and ambitions with
regard to, for instance, the environment, and has defined a group policy to achieve
these goals and ambitions in a coordinated and uniform way, and (ii) that RDS (like
the former parent company) monitors compliance with these group standards and
this group policy, such questions arise as: (a) which (maintenance) standards
applied to an old pipeline whose insides were no longer monitored like the one in
question; (b) were these maintenance standards complied with; (c) if so, what is
this evidenced by, and if not, shouldn’t this have been noted within the context of
the supervision performed by the parent company (the audits); (d) shouldn’t it have
been noted with an adequate reporting system in place and (e) why was it not.
Another question is (f) whether the parent company -considering the autonomy and
individual responsibility of (the management of) SPDC- was sufficiently equipped (as
1075 For example, see Cara-Sophie Scherf, Peter Gailhofer, Nele Kampffmeyer, Tobias Schleicher “Responsibility towards society
and the environment: businesses and their due diligence obligations Background paper from the research project
commissioned by the Federal Environment Agency”, August 2019, German Federal Ministry for the Environment, Nature
Conservation and Nuclear Safety, available at: https://www.umweltbundesamt.de/publikationen/umweltbezogene-
menschenrechtliche at 7. 1076 At para 49: “Bei dieser Verpflichtung handelt es sich nicht nur um eine rein formale Anforderung, sondern die Dokumente
oder anderen Nachweise müssen inhaltlich zutreffend und verlässlich sein. Allein die Vorlage des - wie darzulegen sein wird -
gefälschten Teil-Zertifikats vom 29. Dezember 2012 für die hier in Rede stehenden 16 Stämme Wengé-Holz genügt dieser
Pflicht nicht. Bei einer anderen Sichtweise liefe der Zweck der Norm leer.” The Court also found at para 61 that the fact that
the countries like the DRC have well-known corruption risks is unfortunate for the importing company, but that this does not
diminish the due diligence requirements. 1077 At para 66. 1078 Eric Barizaa Dooh of Goi and others v. Royal Dutch Shell Plc and Others, Court of Appeal of the Hague, 200.126.843 (case
c) + 200.126.848 (case d), December 18, 2015, at para 6.9. On this case, see for instance Claure Bright, “The Civil Liability of
the Parent Company for the Acts or Omissions of Its Subsidiary: The Example of the Shell Cases in the UK and in the
Netherlands”, in Angelica Bonfanti (ed.) Business and Human Rights in Europe: International Law Challenges (2018) 212 at
220.
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far as knowledge, possibilities and means are concerned) to intervene adequately in
case of evident negligence by SPDC.
Similarly, in other cases where due diligence is required, the courts consider whether there
was a process in place, whether the process was implemented, and whether it was
adequate. In English case law relating to statutory due diligence defences, courts and
regulatory bodies have considered management’s telephonic availability,1079 whether
incidents were recorded in logbooks,1080 whether advice from external experts were
sought,1081 whether training programmes effectively imparted sufficient knowledge and
understanding to prevent the incident from taking place,1082 as well as the expertise of the
trainers.1083 It has also been held that having an audit system in itself does not constitute
adequate due diligence as it was not constructed to “pick up [the] failure” and did not in
fact prevent or address the impacts in question.1084
Some laws expressly provide for a due diligence defence, such as the Swiss legislative
proposal and the UK Bribery Act. However, as long as the legal duty does not envision
absolute liability, it is always available for a party to argue, in its defence, that it has met
the standard required by the duty, or in other words, to deny that it has breached the duty
of due diligence. Stakeholders have also pointed out that in accordance with many existing
laws, companies are not provided with a defence of having performed due diligence.
Examples include environmental laws which create offences for companies which have
caused damage, as well as other areas of criminal law relating to tax and health and safety.
Stakeholders emphasised that in these cases a due diligence standard should not “water
down” these existing offences by providing for a due diligence defence where there
currently is none.
Another key feature of due diligence under consideration in this study is its focus on risks
that go beyond the company’s risks to those external risks which affect people the
environment and the planet. As described elsewhere in this study, the OECD Guidelines
have expanded the UNGPs concept of human rights due diligence also to apply due
diligence to risks related to conflict, human rights, labour rights, environment, bribery and
corruption, disclosure and consumer interests.1085 The non-binding guidance to the EU Non-
Financial Reporting Directive also discusses an expanded concept relating to risks external
to the company.1086 Stakeholders have indicated that this signifies a significant shift in
corporate risk management, which is necessitated by the due diligence standard. Although
it takes time to implement this shift into real practices, this trend seems to be irreversible,
1079 See R. (on the application of Tesco Stores Ltd) v City of London Corp [2010] EWHC 2920 (Admin) paras 10 and 26. In this
case, the due diligence defence set out in the section 21 of the then UK Food Safety Act 1990 read with Regulation of the Food
Hygiene (England) Regulations 2006 was applied. See also Lincolnshire County Council v Safeway Stores Plc (1999) EHLR Dig
456 where the defendants successfully relied on the defence of due diligence on the basis of having an adequate system in
place. See also Robert McCorquodale, Lise Smit, Stuart Neely and Robin Brooks, “Human Rights Due Diligence in Law and
Practice: Good Practices and Challenges of Business Enterprises” (2017) 2 Business and Human Rights Journal 195–224. 1080 London Borough of Croydon v Pinch A Pound UK Ltd [2010] EWHC 3283 (Admin) at 34; Tesco v London, ibid, at paras 15
and 22-23. 1081 Croydon, ibid, at para 30. 1082 For example, see Tesco v London, above n 1079 at paras 9 and 11; Croydon, ibid at para 29. 1083 Croydon, ibid, at paras 30 and 33. 1084 Tesco v London, above n 1079 at para 26. 1085 Organisation for Econom
ic Cooperation and Development (OECD), Guidelines for Multinational Enterprises, 2011 (“OECD Guidelines”). 1086 For example, the EU Non-Binding Guidelines on non-financial reporting (methodology for reporting non-financial
information) (2017/C 215/01) of June 2017, state at 3.1: “Companies are expected to consider the actual and potential
severity and frequency of impacts. This includes impacts of their products, services, and their business relationships (including
supply chain aspects).” Moreover, the EU Non-Binding Guidelines on Reporting Climate-Related Information state at 2.3:
“Unless otherwise stated in the text, references to risks should be understood to refer both to risks of negative impacts on the
company (transition risks and physical risks – see below) and to risks of negative impacts on the climate. …Both of these kinds
of risk – risks of negative impacts on the company and risks of negative impacts on the climate – may arise from the
companies own operations and may occur throughout the value chain, both upstream in the supply-chain and downstream.”
[Our emphasis]
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particularly with the recent statement by the Business Roundtable that the purpose of the
corporation extends to the interests of stakeholders.1087
Lastly, a core feature of due diligence is its focus on the steps which are expected of the
individual company: a company can only be held legally liable for not identifying, assessing,
prevent and mitigating its own impacts, or the impacts which it could be reasonably
expected to control or influence through its business relationships. Stakeholders in the
study have noted that in this way, a due diligence standard should not operate to hold
companies liable for systemic issues, which cannot be remedied by a single company, if the
company has done all it can do prevent harms resulting from its own operations.
6.1 Distinction from legal compliance with existing laws
As due diligence is a "do no harm" requirement, the due diligence under discussion in this
study should be distinguished from the ordinary understanding of due diligence for
compliance with laws. Due diligence in this context relates to due diligence for harms,
rather than due diligence for legal compliance.
The existing and proposed laws which require companies to exercise due diligence
discussed in this study all focus on the steps which the company takes to prevent certain
harms (deforestation, child labour, modern slavery). Yet these laws do not simply prohibit
the unwanted outcomes, through absolute liability without a defence (for example, the
model used in many environment and health and safety laws). Instead, the duty is
concerned with whether the company has exercised due diligence to prevent or address
these harms. The due diligence duty therefore has two components: the actual or potential
harm, as well as the company’s steps in relation to those.
Due diligence requires companies to take steps to address relevant harms regardless of
whether they are permitted or prohibited by the laws of the countries where they take
place. In many cases, these harms would in any event be illegal under the laws of the host
state where they take place and / or the home state of the company (such as slavery or
forced labour), but in other cases they may be perfectly legal, or even required by, national
law (such as where the relevant national law does not require free, prior and informed
consent, or where local laws are discriminatory against LGBTI persons).
Accordingly, due diligence in this study does not concern due diligence for compliance with
existing laws, which companies are already required to comply with. Due diligence a legal
standard of care would be an additional legal duty, which does not currently exist in this
context. The UNGPs describe this as follows:1088
The responsibility to respect human rights is a global standard of expected conduct
for all business enterprises wherever they operate. It exists independently of States’
abilities and/or willingness to fulfil their own human rights obligations, and does not
diminish those obligations. And it exists over and above compliance with national
laws and regulations protecting human rights. [Our emphasis]
Similarly, Bonnitcha and McCorquodale1089 highlight that due diligence in this context
should be distinguished from the commonly used term of “due diligence” in day-to-day
business language, which refers to a once-off, but not usually legally required, review of
legal compliance and other risks before a transaction, merger or investment takes place.
1087 US Business Roundtable, “Statement on the Purpose of a Corporation”, August 2019, available at:
https://opportunity.businessroundtable.org/wp-content/uploads/2019/08/Business-Roundtable-Statement-on-the-Purpose-of-
a-Corporation-with-Signatures.pdf. 1088 Commentary to UNGP 11. 1089 Jonathan Bonnitcha and Robert McCorquodale, “The Concept of 'Due Diligence' in the UN Guiding Principles on Business
and Human Rights“, 28 European Journal of International Law (2017) 899 at 900.
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6.2 Distinction from other models of regulation
In light of the above, it is important to distinguish due diligence as a legal standard of care
from other models of regulation.
Due diligence is not itself a reporting requirement, nor is it a disclosure requirement. It is
also not a “list” of activities which a company needs to undertake, nor a list of issues which
a company needs to consider.
Although due diligence as described in the UNGPs has a component of “communication”,
this does not exclusively refer to public reporting in corporate reports, but also includes
wider public engagement and consultation with stakeholders. It is noted also that due
diligence reporting requires publication of information relating to the due diligence, i.e. the
steps or actions taken or put in place, including on the effectiveness of these measures,
and not necessarily of the actual adverse impacts identified, which in many cases may
contain sensitive information. Therefore, reporting or disclosure may or may not be
undertaken as part of meeting the standard of due diligence. In some cases, as with certain
SMEs, disclosure may not be required or reasonable, as long as the standard of care is met.
Recent reporting requirements such as those under consideration in this study ask
companies to report on their due diligence steps. Although these laws do not establish a
legal duty to undertake due diligence, the terminology of due diligence as used by reporting
requirements may have contributed to a perception that due diligence is the same as
reporting.
This, in turn, may have contributed to the impression amongst stakeholders, evidenced in
the Market Practices section, that due diligence would require an administrative burden or
compliance exercise which would be disproportionate for SMEs with less resources to
undertake. In many instances due diligence can operate as part of existing processes, such
as on health and safety, and with labour relations.
However, due diligence standards, including the UNGPs and OECD Guidelines, describe the
appropriate due diligence measures taken to be proportionate to risk, and expressly refer
to the limited resources of SMEs in this regard. Shift has also highlighted1090 what some of
stakeholders have pointed out: that SMEs may need to take significantly less due diligence
steps than their larger peers, insofar as smaller companies have smaller footprints, fewer
employees, and their internal risk management processes are often within the knowledge
control of one or a few individuals. In this way, economies of scale do not necessarily apply
to due diligence: a larger company with a larger footprint is likely to require significantly
more formal, structured and sophisticated processes than a local micro business.
6.3 Interaction with existing laws and other regulatory options
Due diligence as a legal standard differs from the requirements of the EU Non-Financial
Reporting Directive, and other corporate reporting requirements which, even when they
take a wider view of the external sustainability risks on in the long term, nevertheless
require information relating to material or principal risks to the company’s performance.
For example, the Non-Binding Guidelines on Reporting Climate-Related Information in
terms of the EU Non-Financial Reporting Directive describe the “double materiality
perspective” which focuses not only on “financial materiality”, but also on the impacts of its
1090 Francis West for Shift, “SMEs and the Corporate Responsibility to Respect Human Rights
Busting the Myth that Bigger is Always Better” May 2019, available at:
https://www.shiftproject.org/resources/viewpoints/busting-myth-smes-corporate-responsibility-respect-human-rights/.
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activities, described as “environmental and social materiality”.1091 Whereas the former is
focused on the interests of investors, the latter is “typically of most interest to citizens,
consumers, employees, business partners, communities and civil society organisations”.1092
However, as is evidenced by the Country Reports, this new understanding of the double
materiality perspective is yet to be applied by regulators within Member States in
overseeing compliance with the relevant national laws on corporate reporting which
implement the Directive.1093 Instead, Member States’ implementation have taken place in
the context of corporate reporting laws which have traditionally focused on the materiality
of the impacts of the company’s activity on the company’s (short or long term)
performance. Furthermore, despite described in the Non-Binding Guidance as having an
interest in the “environmental and social materiality”, the Directive does not provide
external stakeholders with a right of action in case of a failure to report on such
information.
In contrasting due diligence with the requirements of corporate reporting, the question as
to whether an external harm will, in the long or short run, affect the company’s
performance is irrelevant for the purposes of due diligence as a legal standard. Due
diligence as a legal standard or duty of care requires companies to exercise the care
required to prevent and address external harms, regardless of whether these are harms
beneficial, detrimental or neutral to the company’s performance in the long or short run.
Reporting standards require companies to report on the steps they have taken, but do not
legally require them to take any steps towards meeting a certain standard of care. So a
reporting requirement could be satisfied by referring in a public report to specific processes
which would not constitute adequate due diligence. The reporting requirements under
discussion in this study do not have a built-in test of the adequacy of the steps or
processes which are reported. Where reporting requirements are enforced, either by
shareholders or regulators, this usually relates to matters such as whether there was a
report which contains the required information, the veracity of the information reported,
and whether any materials risks were omitted.
Many existing corporate reporting requirements, including the EU Non-Financial Reporting
Directive, require reporting on aspects which would be included as part of a due diligence
obligation. The EU Non-Financial Reporting Directive is fairly new, and similar reporting
requirements in other areas of corporate law, such as section 172 of the UK Companies
Act, are yet to be enforced by regulators (see UK country report). Insofar as reporting
requirements are centred around those risks that are material to the company, a
mandatory due diligence duty would serve to clarify what constitutes material information.
If there is a law requiring a standard of care which could lead to legal liability, it is unlikely
that a director could argue that any risks relating to this duty would not constitute material
information.
Reporting and due diligence requirements are therefore complementary, and potentially
interact with one another. For example, as evidenced in various cases, and described by
interviewees, publicly reporting on steps taken should help a company prove that it has
undertaken due diligence. Reporting on due diligence steps taken would therefore be in the
company’s interest once a duty to undertake due diligence is established, although the due
diligence standard would not in itself proscribe the extent or detail reporting required.
Instead, reporting would be part of the company’s risk management in terms of its due
1091 Non-binding guidelines on reporting climate-related information above n 1086 at 2.2. 1092 Ibid. 1093 Neither the EU Non-Financial Reporting Directive itself, nor the June 2017 Non-Binding Guidance refers to “double
materiality” or to ”financial materiality” or “environmental and social materiality”. These concepts were introduced by the Non-
Binding Guidance on Reporting Climate-Related Information during the course of this study, in June 2019. The Directive refers
to the “impacts of [the company’s] activity” in Art 19a(1).
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diligence. As far as a due diligence duty of care is concerned, certain sensitive findings may
be omitted from company reporting, as long as it is reasonably or adequately addressing
these impacts on an ongoing basis and proportionately to the severity of the risk.
In turn, a mandatory due diligence duty would influence and complement existing reporting
requirements, which ask companies to report on the steps they have undertaken. (The due
diligence which they undertake in terms of the mandatory due diligence duty would of
course also be included in these steps.) A duty of care of due diligence would provide focus
and confirmation of what kind of information is material or expected in terms of specific
reporting requirements. This would provide significant clarity where currently the concept of
“materiality” still seems to be unclear, and, as noted by stakeholders in this study, often
dependent on individual directors and shareholders’ persuasions regarding the “business
case” benefits of voluntary sustainability for the company.
For those companies that are already undertaking those due diligence steps in order to
report on them, a due diligence duty would not necessarily constitute a significant
additional burden. For those companies that are simply reporting without having any
substantive due diligence on which to report, a due diligence duty would require an
evaluation of whether they are undertaking adequate risk management steps, for the
purposes of both the due diligence duty and the reporting requirement.
In addition, the due diligence standard would also influence the fiduciary duties of directors.
Although the due diligence duty would apply to the company, the company would be liable
in the case of failing to meeting the standard, which in turn would influence the fiduciary
duty of the directors, namely to act in the interest of the company. In this way, the due
diligence duty would inform how and to what extent directors are expected to undertake
risk management for these external harms. Without this legal duty, some of these external
harms may not otherwise be viewed as posing materials risks for the company’s
performance.
In addition to existing reporting requirements, there are multiples of other existing laws
that apply, both at EU and Member State level, to corporate activities and their impacts on
people, the environment and the planet. These laws already have the intention, and effect,
of preventing such harms by business, especially with regard to their own activities within
the EU itself. These laws would likely influence the content of the standard which is
expected under each individual circumstance. If companies are complying and satisfied that
they are preventing their harms in accordance with these laws, they may also be able to
demonstrate that they are thereby meeting their due diligence standard, unless there are
additional or severe impacts at stake in the specific circumstances.
6.4 Non-binding guidance
As noted above, due diligence is not a list of requirements that companies need to “tick
off”. Regardless of how detailed such a list would be, all the possible risk factors would
never all be applicable to the same company. If companies were required to “tick off” such
lists regardless of whether these risks even apply to the particular company in question, the
law would possibly operate in a prohibitively burdensome way. The OHCHR has warned
against the risks of a duty that “overly detailed and proscriptive” as this may lead to
“narrow, compliance-orientated, ‘check-box’” processes.1094
However, the concept of due diligence is by its nature wide, and it often takes several years
for courts and industries to flesh out the content of how such standards would be applied.
1094 OHCHR, “Improving accountability and access to remedy for victims of business-related human rights abuse: the relevance
of human rights due diligence to determinations of corporate liability”, UN Doc. A/HRC/38/20/Add.2, 1 June 2018 at 17 and
18.
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For this reason, regulators at national level have made use of guidance to inform the
implementation of due diligence standards in other areas. Such non-binding but influential
guidance would ordinarily provide examples of some of the factors that companies could
take into account, without requiring them to “tick off” steps that are not applicable to their
risks. It informs all parties of how the law is likely to be applied, including companies that
have to put in place procedures, claimants who seek to ascertain whether they may have a
cause of action, and regulators and courts who are mandate with applying the law. In this
way, non-binding guidance is commonly used to perform immediately the function which
case law and evolving practice would otherwise take years to achieve.
In the absence of dedicated non-binding guidance accompanying a specific due diligence
measure, existing guidance, laws and standards could nevertheless inform the
development and application of a due diligence standard. However, without the influential
authority of dedicated non-binding guidance, companies may have less legal certainty
about the application and relevance of these standards.
It is noted that where examples of risk factors are listed in non-binding guidance, each
factor will still just be one aspect which the company would be expected to take into
account. For example, a company is not seen as failing in its due diligence expectations
simply because it operates in a high risk environment. Instead, the question is how the
company addresses these risks. What is the size and nature of the company and how does
it identify, prioritise and prevent or mitigate its risks? Does it have leverage, and if so, how
is it exercising it? How is it increasing its leverage?1095 Only if the company has no
leverage, and any attempts at increasing leverage are unsuccessful, would a company be
expected to consider leaving a jurisdiction, although this may be the necessary outcome.
This may differ dramatically from one company to the next, even within the same “high
risk” country or “high risk” sector, depending on the steps which the company is taking to
identify, assess, prevent and mitigate any actual or potential harms.
Through undertaking due diligence, companies are expected to understand and assess their
risks and put in place real and effective processes to manage their risks. Often, those
companies that have high risks, and have as a result faced public allegations, are the ones
are taking action to improve their risk management actions.1096 These companies may
score very low on any “tick-box” list by virtue of the countries or contexts where they
operate. However, if the quality of their real processes are considered and evaluated, they
may likely be deemed to meet the standard better than a company which operates in what
it perceives as a low risk context and has therefore never assessed its external risks.
Finally, undertaking due diligence can have positive impacts for a company. As the OECD
Guidance on Due Diligence for Responsible Business Conduct makes clear:1097
Effectively preventing and mitigating adverse impacts may in turn also help an
enterprise maximise positive contributions to society, improve stakeholder
relationships and protect its reputation. Due diligence can help enterprises create
more value, including by: identifying opportunities to reduce costs; improving
understanding of markets and strategic sources of supply; strengthening
management of company-specific business and operational risks; decreasing the
probability of incidents relating to matters covered by the OECD Guidelines for
MNEs; and decreasing exposure to systemic risks. An enterprise can also carry out
due diligence to help it meet legal requirements pertaining to specific [Responsible
Business Conduct] issues, such as local labour, environmental, corporate
governance, criminal or anti-bribery laws.
1095 Commentary to UNGP 19. 1096 See for example McCorquodale et al above n 1079. 1097 OECD “OECD Guidelines for Multinational Enterprises: Responsible Business Conduct Matters”, available at:
http://mneguidelines.oecd.org/MNEguidelines_RBCmatters.pdf at 16.
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In this way, it is clear that due diligence as a legal of standard of care operates as a risk
management exercise for the company. The more accurate and engaged the due diligence,
the higher the likelihood that the company will be able to identify, prioritise and address its
most severe risks in reality.
7. Further considerations around scope of application
A few further considerations are relevant to the discussion of regulatory options for
intervention. These were not discussed above as separate sub-options, as they relate to
questions that apply to all of the above options.
7.1 Accompanying non-binding guidance on the mandatory duty
As evidenced in the Market Practices section, several stakeholders emphasised that in
order to create a “level playing field”, there is a need for a wide and general legal duty,
but it was also emphasised across the spectrum that, similar to due diligence in the
UNGPs and the OECD Guidelines, the content of the duty would need to be informed by
the circumstances of each context.
This balance was also described by the UN OHCHR in its 2018 report on domestic laws
requiring due diligence as a standard of conduct assorted with a legal liability regime:1098
Such laws can give companies clarity with respect to the human rights due
diligence activities they are required to perform. This could help create a level
playing field for companies, give human rights due diligence clear legal force,
educate stakeholders and the wider public about company activities, and
ultimately reduce risks of adverse human rights impacts from occurring.
However, the report also warns against the unintended consequences that can result
from having overly detailed due diligence regulation:1099
The possibility that overly detailed and proscriptive legal regimes could
discourage innovation and proactive behavior by companies and encourage
narrow, compliance-orientated, "check-box" human rights due diligence
processes…On the other hand, too much flexibility may not provide sufficient
levels of legal certainty for companies (especially if criminal sanctions are to be
applied) and could make the regime difficult to enforce.
This balance can be difficult to strike in practice, and States should give careful
thought to the policy aims of legislation when reconciling these competing
considerations. [Our emphasis]
The challenge of striking this balance between a general duty and specific certainty
about its potential application in different circumstances was addressed in the case of
the EU Non-Financial Reporting Directive with accompanying non-binding guidance.
Article 2 of the directive provides in particular that:
[T]he Commission shall prepare non-binding guidelines on methodology for
reporting non-financial information, including non-financial key performance
indicators, general and sectoral, with a view to facilitating relevant, useful and
comparable disclosure of non-financial information by undertakings. In doing so,
the Commission shall consult relevant stakeholders.
1098 UN Human Rights Council, above n850 at para 16. 1099 Ibid at paras 17 and 18.
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Recital 17 of the Directive specifies that in preparing these non-binding guidelines “the
Commission should take into account current best practices, international developments
and the results of related Union initiatives”.
As a result, the Commission has published non-binding guidelines on the methodology
for reporting non-financial information in 2017,1100 and guidelines on reporting climate-
related information in 2019,1101 to accompany the EU non-financial reporting Directive.
These guidelines were adopted after the NFRD and it is possible that further guidance
may be added, as the needs and context develop.
Although the guidelines are expressly non-binding, they have been influential in
understanding the application and implementation of the measure.
It was noted by various stakeholders in our Market Practices section that an EU-level
legislation requiring mandatory due diligence could be similarly complemented by non-
binding guidance in order to inform the implementation of the measure over time. This
would allow for the regulation envisaged not to be too prescriptive and for its content to
apply widely. It would also allow for the due diligence standard to adapt to specific
sectors, contexts, issues and types of companies, which differs widely in practice.
For instance, a report of the UN Working Group on the issue of human rights and
transnational corporations and other business enterprises highlighted that:1102
[T]he development of specific guidance for different types of businesses (e.g.,
informal businesses, small and medium-sized enterprises and multinational
corporations) would be useful. Similarly, business enterprises operating in
different sectors might benefit from supplementary guidance tailored to the
specific challenges they face.
In this way, the benefits relating to influence and low implementation costs discussed in
Option 2 of the Regulatory Options in this study could be harnessed, but with the
additional benefits of the accompanying binding duty, which has been indicated to be the
biggest weakness of voluntary guidance.
Non-binding guidance accompanying a general due diligence regulation could include
some the following. Note that this is not an exhaustive list, but a selection of some
standards and guidance which were named by stakeholders during the course of this
study:1103
Reference to international standards such as:
The UN Guiding Principles on Business and Human Rights
The OECD Guidelines
1100 Communication from the Commission, “Guidelines on non-financial reporting methodology for reporting non-financial
information”, 2017/C 215/01, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52017XC0705(01). 1101 Communication from the Commission, “Guidelines on non-financial reporting: Supplement on reporting climate-related
information”, 2019/C/01, available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52019XC0620(01). 1102 Report of the UN Working Group on the issue of human rights and transnational corporations and other business enterprises, “Gender dimensions of the Guiding Principles on Business and Human Rights”, A/HRC/41/43 (23 May 2019) at
para 10.
1103 Please note that this list provides only some examples which were listed by stakeholders. In this area there are a wealth of
tools and guidance and it would fall outside the scope of this study to compile a comprehensive list. Please also see the
Business and Human Rights Resource Centre which provides a detailed resource of materials, tools, and guidance, available at:
www.business-humanrights.org.
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The OECD Due Diligence Guidance for Responsible Business Conduct: which
provides practical support to companies on the implementation of the due
diligence requirements contained in the OECD Guidelines.
Reference to existing sector-specific guidance and initiatives such as:
The OECD Due Diligence Guidance for Responsible Supply Chains of
Minerals from Conflict-Affected and High-Risk Areas
The OECD Due Diligence Guidance for Meaningful Stakeholder
Engagement in the Extractive Sector
The OECD Due Diligence Guidance for Responsible Supply Chains in the
Garment and Footwear Sector
The OECD-FAO Guidance for Responsible Agricultural Supply Chains
The Better buying Initiative:1104 which is a unique system for suppliers to
communicate with their buyers about purchasing practices.
Reference to sector-specific industry programmes such as:
The industry schemes set up to support responsible minerals sourcing
such as, for instance:
o the London Bullion Market Association
o the Responsible Minerals Initiative
o the Responsible Jewellery Council
o the International Tin Supply Chain Initiative
o the Dubai Multi-Commodities Centre
o The Equator Principles.
Reference to existing guidance on how to address specific risks, such as:
The gender chapter on integrating gender issues into due diligence in the
OECD guidance for Responsible Business Conduct1105
The UN Working Group on Business and Human Rights report on the gender
dimensions of the Guiding Principles on Business and Human Rights1106
The academic briefing on the need for business actors to undertake gender-
responsive due diligence1107
The European Commission Report on Critical Raw Materials and the Circular
Economy1108
The European Commission Report on the implementation of the Circular
Economy Action Plan1109
The Joint Ethical Trading Initiatives (ETI) Guide on Buying Responsibly.1110
The Principles on Climate Obligations of Enterprises.1111
The Children's Rights and Business Atlas.1112
Reference to indices and indicators such as:
1104 Better Buying Initiative, available at: https://betterbuying.org. 1105 OECD, “Due Diligence Guidance for Responsible Business Conduct” at 41. 1106 UN Human Rights Council, above n868. 1107 Bourke and Umlas above n868. 1108 European Commission, “Report on Critical Raw Materials and the Circular Economy”, Commission Staff Working Document,
16 January 2018, SWD(2018) 36 final. 1109 European Commission, above n 932. 1110 The Joint Ethical Trading Initiatives, “Guide to buying responsibly”, available at:
https://www.ethicaltrade.org/resources/guide-to-buying-responsibly. 1111 Expert Group on Climate Obligations of Enterprises, 5 Principles on Climate Obligations of Enterprises (Eleven International
Publishing, 2018), available at:
https://climateprinciplesforenterprises.files.wordpress.com/2017/12/enterprisesprincipleswebpdf.pdf. 1112 Unicef, “Children’s Rights and Business Atlas”, available at: https://www.unicef.org/csr/businessatlas.htm.
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The Environmental Performance Index (EPI): which are metrics which
score 180 countries based on their environmental performance;
The Wage indicator;1113
The Fair Trade price of relevant commodities or products.
7.2 Regulation of transnational corporate activity: foreign-based
subsidiaries, suppliers and third parties
One of the problems perceived in the analysis of the study was that many of the human
rights and environmental harms discussed take place outside of the EU within the
subsidiaries or value chains of EU companies.
Parent companies and their (foreign) subsidiaries are traditionally treated as separate
legal entities in matters relating to legal liability for harms caused. Whereas some
financial other types of regulation applies to the entire corporate group,1114 these do not
ordinarily create civil liability for harms caused to third parties. Even where a parent
company issues consolidated accounts for its foreign subsidiaries, it is seen as a
separate legal entity from its subsidiaries in relation to damages caused. As a result of
this limited liability, and as evidenced in the Regulatory Review, claimants are unable to
take legal action against a corporate group or a parent company for harms caused by a
foreign subsidiary, unless the cause of action is based on a failure of a duty by the
parent company itself.
Similarly, suppliers and other third parties in the value chain are distincts legal entities.
In order to cover its intended reach, the regulation would need to require EU companies
to undertake due diligence for harms caused by other enterprises within the corporate
group, including foreign subsidiaries, as well as for the adverse impacts of activities
within the supply and value chain.
It is noted that although the EU legal duty itself would only apply to companies linked to
or operating in the EU, it would require these companies to undertake due diligence for
those companies whose activities are included within the defined scope, including
subsidiaries, suppliers and third parties in the value chain who are located in third
countries. In turn, these non-EU entities would not themselves be bound by the EU law,
but the adverse impacts of their activities would potentially need to be covered as part
of the due diligence processes of their EU business partners.
The test as to how the legal scope should be defined would need to be considered. For
example, a recent report by ClientEarth and Global Witness on EU-level mandatory due
diligence to protect people and the planet suggests that the obligation could apply to all
EU-based companies, or companies providing goods or services in the EU.1115
The EU and its Member States already regulate transnational corporate activities in
various areas of law. Some of these regulations are not limited to subsidiaries or entities
within the corporate group, or even to the supply or value chain, but extend to other
actors such as agents, associated persons or branches.
Examples of how transnational corporate activity in the area of due diligence for
responsible business conduct is currently regulated by the EU and in companies’ home
states are listed in the Regulatory Review as well as in Table C.1 in PART IV Annexure
C: Application of EU and domestic law provisions to companies, and include:
1113 https://wageindicator.org. 1114 Art 2(11) of Directive 2013/34/EU refers to the corporate group as a parent undertaking and all its subsidiary
undertakings. 1115 ClientEarth and Global Witness above n 163 at 14.
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The domicile of the defendant is the test used to determine both the scope of
application of the Brussels I Recast Regulation and the place in which EU
domiciled defendants are to be sued for civil liability claims. When the defendant
is a company, the domicile is defined by Article 63 of the Regulation as the place
where it has its statutory seat, central administration or principal place of
business.
The EU non-financial reporting requirement applies to relevant large public-
interest companies domiciled in Member States,1116
and uses the “business
relationship” test to determine which impacts need to be covered in reports;
The EU Conflict Minerals Regulation will apply to importers of tin, tantalum, and
tungsten, their ores, and gold into the EU.
The EU Timber Regulation applies to all operators supplying timber and timber
products in the EU.1117
The UK Modern Slavery Act applies to large companies carrying on a business, or
part of a business, in any part of the United Kingdom.1118
It requires companies to
disclose the steps that they have taken to ensure that slavery and human
trafficking is not taking place "(i) in any of its supply chains", and "(ii) in any part
of its own business".
The UK Bribery Act applies to companies incorporated under the law of any part
of the United Kingdom, and applies to bribery activities associated with such
companies that take place anywhere in the world.1119
The French Law on the Duty of Vigilance applies to companies registered in
France,1120
and requires a standard of care for the activities with which the French
company has an “established relationship”;
The Dutch Child Labour Due Diligence Law applies to companies selling goods and
supplying services on the Dutch market.1121
The Swiss Popular Initiative on Responsible Business purports to apply to
companies that have their registered office, central administration, or principal
place of business in Switzerland,1122
and uses the “factual control” or “economic
control”1123 test to determine the scope of liability for due diligence.
The Swiss counter-proposal uses instead the more limited “effective control” test
which is based on accounting standards, and essentially extends liability for due
1116 EU Non-Financial Reporting Directive above n 24. 1117 EU Timber Regulation above n 22. 1118 Sections 54(2) and 54(12) of the UK Modern Slavery Act above n 30. 1119 Section 7 of the UK Bribery Act above n 321. 1120 Stéphane Brabant and Elsa Savourey, “Scope of the Law on the Corporate Duty of Vigilance: Companies Subject to the
Vigilance Obligations“, Revue Internationale de la Compliance et de L’éthique des Affaires – Supplément à la Semaine Juridique
Entreprise Et Affaires No 50 (14 December 2017), available at: http://www.bhrinlaw.org/frenchcorporatedutylaw_articles.pdf. 1121 The Netherlands Child Labour Due Diligence Act 2019. 1122 SCCJ Initiative Text above n 493. While the scope of the Swiss Popular Initiative encompasses all Swiss-based companies,
the scope of counter-proposal adopted by the National Council on 14 June 2018 is more restricted as it applies to Swiss-based
companies exceeding two of the following three thresholds: a balance sheet total of 40 million CHF/USD; a turnover of 80 million
CHF/US, or 500 full-time employees. See SCCJ “How does the parliamentary counter-proposal differ…” above n 493. 1123 Under Art. 101a al. 2 lit.a Cst: Whether a company controls another is to be determined according to the factual
circumstances. Control may also result through the exercise of power in a business relationship.
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diligence to foreign subsidiaries only (rather than into the supply or value
chain).1124
The draft unofficial outline which is currently being discussed amongst
stakeholders in Germany purports to apply to companies that have their
registered office, central administration, or principal place of business in
Germany.
Examples of how transnational corporate activity is currently regulated at EU level in
other areas of law are set out in Table C.2 in PART IV Annexure C: Application of
EU and domestic law provisions to companies, and include:
In EU competition law, a parent company can be liable for the infringement of EU
competition law rules by its subsidiary when it exercises "decisive influence" over
the conduct of such subsidiary, in which case both parent company and
subsidiary are considered to form a "single economic unit" and therefore form a
"single undertaking" within the meaning of Article 101 TFEU and are jointly and
severally liable for the payment of the fine.1125
Similarly, in EU Data Protection Law, a company can be liable for GDPR
infringements of the entities over which it exercises a "decisive influence" so as to
form a single economic entity, hence part of the same undertaking.1126
In EU Anti-Money Laundering Directive, the Directive applies expressly to
activities which took place outside of the EU. The Directive applies to institutions
with branches in the EU, regardless of whether the head office is within the
EU.1127
The above demonstrates that the regulation of transnational corporate activity is not at
all unprecedented in the EU and its Member States, and is done in a variety of ways.
One or a combination of these legal tests may be usefully copied for the application of
the regulation. For example, in this case, the regulation could apply to companies
registered, domiciled, or with their main place of business in an EU Member States, as
well as those companies carrying out business or operating in the EU, including as
subsidiaries, subcontractors and other business partners of non-EU companies.
The above examples also show that, in other areas of law, the level of factual influence
exercised by the company is often determinative. Similarly, the concept of leverage is
defined with reference to the level of influence which a company has over a third party.
However, by using the “influence” or “control” tests to determine liability, a mechanism
may incentivize companies to disengage from those activities in an attempt to remote
itself from the scope of application. Instead, the concept of leverage actually expects
companies to proactively engage more, and to demonstrate this engagement. In this
way, a due diligence duty could utilize the legal test for “influence” or “control”, by
requiring companies to show that they have in fact exercised the expected amount of
leverage to meet the due diligence standard.
7.3 Implementation at Member State level
1124 The Swiss Initiative on Responsible Business aims to cover subsidiaries and economically controlled entities, whereas the
counter-proposal is limited to legally controlled subsidiaries (and only when control is really exercised). See SCCJ “How does
the parliamentary counter-proposal differ…” above n 493. 1125 For example see Akzo Nobel and Others v Commission [2009] ECR I-8237. 1126 EU GDPR above n 473 at 1–88. 1127 Art 1(4) of the 4th EU Money Laundering Directive 2015/849 of the European Parliament and of the Council of 20 May
2015.
277
In accordance with Art 50 of the Treaty for the Functioning of the European Union and
the TOR, it is anticipated that a legal duty which is formulated in European company law
would most likely take the form of a Directive.1128 In this way, the enforcement would
take place within the individual legal systems of Member States, although the duty and
its scope, including a requirement to provide for liability, would be established at EU
level. It is noted that comparative EU regulation discussed in this study which take a
similarly cross-sectoral approach, such as the EU Non-Financial Report Directive, also
takes the form of a Directive.
Given the wide range of differences in the legal systems discussed in the Regulatory
Review, the most effective implementation at Member State level would need to be
considered in the design of any possible future EU intervention. It is noted that the two
enforcement sub-options, relating to state-based oversight mechanisms and judicial or
non-judicial remedies are not mutually exclusive and could both be created within the
same instrument and operate simultanouesly in a complentary manner.
7.4 Material scope of adverse human rights and environmental impacts
One question which would need to be considered is the material scope of the due
diligence duty to be created. In order to create legal liability, the material scope of the
which kinds of impacts companies’ due diligence would need to cover would have to be
described with a certain degree of clarity, without limiting the open-endedness and
flexibility of the general duty.
The UNGPs state that due diligence should cover “at a minimum” “all internationally
recognized human rights”.1129 This is because business enterprises “may potentially
impact virtually any of these rights.”1130 As evidenced elsewhere in this study, this is
understood to include environmental impacts. The UNGPs list as “an authoritative list of
the core internationally recognized human rights” those which are listed in the Universal
Declaration of Human Rights, the International Covenant on Civil and Political Rights, the
International Covenant on Economic, Social and Cultural Rights, and the principles
concerning fundamental rights in the eight ILO core conventions as set out in the
Declaration on Fundamental Principles and Rights at Work.1131
The phrase “at a minimum” is also important, as other international human rights
treaties which are not included in this list but would nevertheless be commonly
understood to constitute internationally recognized human rights. Examples include the
Convention on the Rights of the Child, the Declaration on the Rights of Indigenous
Peoples, Convention on the Rights of Persons with Disabilities, the Convention on the
Elimination of all Forms of Discrimination Against Women.
Alternatively, an EU regulatory provision might require due diligence for “all EU-
recognised human rights and environmental impacts”, which is the definition provided
for reference to stakeholders in the survey of this study. The question would be how this
would be defined in cases where individual Member States have signed up to treaties
which others have not signed. It is also noted that this would deviate from the UNGPs
and the OECD Guidelines which refer to internationally-recognized human rights.
The French Duty of Vigilance Law applies to human rights and environmental harms
without expressly defining the material scope of these harms. However, insofar as the
1128 A Directive is “a legislative act that sets out a goal that all EU countries must achieve. However, it is up to the individua l
countries to devise their own laws on how to reach these goals”. Europa, “Regulations, Directives and other acts“, available at:
https://europa.eu/european-union/eu-law/legal-acts_en. 1129 Commentary to UNGP 18. 1130 Commentary to UNGP 18. 1131 Commentary to UNGP 12.
278
UNGPs are expressly indicated as a justification for this law, it is expected that
internationally recognized human rights and environmental standards may be applied.
Whilst the Swiss Responsible Business Initiative applies to internationally recognized
human rights and environmental standards, the parliamentary counter-proposal is
limited to the binding provisions under international law ratified by Switzerland.1132
An unofficial outline for a possible German draft law which is being considered by
stakeholders refers to internationally recognized human rights, and defines this with
reference to a list of international human rights treaties in an annex.1133 An August 2019
study for the German Federal Ministry of Environment on the concept of environmental
due diligence and how it could be applied as a legal requirement argues that for
environmental due diligence “there is a lack of an international framework of reference
similar to that for international human rights”.1134
It is noted that an approach which simply requires due diligence for legal compliance
with existing laws of the host (or home) state would not itself add any new legal
obligations, as companies are in any event already required to comply with those laws of
the countries where they operate. Moreover, such an approach would contradict the
approach of the UNGPs which set out that the responsibility to respect “exists over and
above compliance with national laws and regulations”.1135
Another possibility would be that the duty would apply to “human rights and
environmental harms” and that the material scope would be described in further detail in
accompanying non-binding guidance. This is the approach followed in the French Duty of
Vigilance Law.
7.5 Conflict of laws considerations
Under the general rule laid down in Article 4 of the Rome II Regulation, the applicable
law which governs transnational civil liability claims is the law of the place where the
damage occurred. With regard to transnational civil claims arising out of environmental
damage or damage sustained to persons or property as a result of such damage, Article
7 of the Rome II Regulation provides that claimants can choose between the law of the
place where the damage occured and the law of the country in which the event giving
rise to the damage occurred.
Notwithstanding the exceptions to the general rule laid down in Article 4,1136 and the
special rules contained in the Rome II Regulation,1137 the law of that host state will thus
generally be the applicable law where the damage took place in a third country.1138
However, as we have seen in the Regulatory Review, there is currently a general lack of
1132 SCCJ “How does the parliamentary counter-proposal differ…” above n 493. 1133 See above n 410. 1134 Scherf et al above n 583 at 9. 1135 Commentary to UNGP 11. See also UNGP 23. 1136 Article 4 of the Rome II Regulation also provides for some exceptions according to which “where the person claimed to be
liable and the person sustaining the damage both have their habitual residence in the same country at the time when the
damage occurs, the law of that country shall apply“ (Article 4.2); and “ where it is clear from all the circumstances of the case
that the tort/delict is manifestly more closely connected with a country other than indicated in paragraphs 1 or 2, the law of
that other country shall apply“ (Article 4.3). 1137 These special rules concern in particular, product liability (Article 5), unfair competition and acts restricting free
competition (Article 6), environmental damage (Article 7), infringement of intellectual property rights (Article 8), industrial
action (Article 9), unjust enrichment (Article 10), negotiorum gestio (Article 11), culpa in contrahendo (Article 12) and the
rules of safety and conduct (Article 17). 1138 This is the case at the very least concerning civil liability claims arising out of human rights violations. The situation is
more complex with regard to civil claims arising out of environmental damage for which, in theory at least, the law of the
home state (i.e. the law of the place where the company is domiciled) could be applicable provided that the claimant can prove
that the event giving rise originated from an action/inaction or decisions on the part of the parent or lead company. However,
this can be very difficult to prove in practice. On this point see in particular Axel Marx, Claire Bright and Jan Wouters, “Access
to Legal Remedies for Victims of Coporate Human Rights Abuses in Third Countries“, 2019, available at:
http://www.europarl.europa.eu/RegData/etudes/STUD/2019/603475/EXPO_STU(2019)603475_EN.pdf, at 118.
279
binding due diligence duties at national level both in EU member states and elsewhere.
In addition, a recent study for the European Parliament on Access to justice for victims
of corporate human rights abuses in third countries has shown that this constitutes a
significant barrier to accessing legal remedies for claimants in civil proceedings arising
out of alleged human rights abuses by EU companies in third countries.1139 The study
underlines in particular that “the effect of applying the law of the host state (as the law
of the country in which the damage occurs) is often to deprive the victims of access to
substantive justice and legal remedies”.1140
The report highlights in this respect that:1141
The possibility for the forum to apply its own law is confined to two mechanisms
under the Rome II Regulation: the overriding mandatory provisions and the
public policy exception. It has been argued that overriding mandatory provisions
could be used to substitute the law of the forum (or part of it) for the law
normally applicable when the latter is not sufficiently protective of the human
rights of the victims. In addition, legislative provisions on mandatory due
diligence such as the French Law on the Duty of Vigilance, could form the basis
for overriding mandatory rules to ensure their applicability in civil liability cases
relating to corporate human rights abuses in third countries. Moreover, the public
policy exception could 'provide an important minimum guarantee (or "emergency
brake") in foreign direct liability cases that are brought before EU Member State
courts but governed by host country law, especially since fundamental human
rights principles, whether ensuing from international or domestic law, are
considered to be part of the public policy of the forum. These two exceptions
provide, theoretically at least, the possibility for the forum state to apply its own
law (at least in part) when the law of the host state does not offer enough
protection for the human rights of the victims, or when damages in host countries
are too low to deter businesses from further abuse. The Committee of Ministers of
the Council of Europe has encouraged EU MS to make use of them. However, this
possibility has not been confirmed in practice, and, in any case, their application
is supposed to remain exceptional.
In order to address these issues, the study suggests that:1142
A further choice of law provision be added to the Rome I Regulation. This
provision would be specific to business-related human rights claims and allow the
claimant to choose between the lex loci damni, the lex loci delicti commissi and
the law of the place where the defendant company is domiciled in order to ensure
more effective access to justice. This proposition would take into consideration
the specific nature of the business-related human rights claims and redress the
power imbalance between the parties, the victims usually being in a situation of
particular vulnerability in relation to the multinational companies. It would also
promote the interests of the respective countries and of the EU as a whole in
upholding higher human rights standards. In this respect, it has been noted that
'the possibility of pursuing foreign direct liability cases in EU Member States on
the basis of home country tort law is of fundamental importance. It determines
whether EU MS can deploy their national rules in the field of civil liability as a
much needed regulatory instrument to promote international corporate social
responsibility and, more specifically, respect for human rights by EU-based
enterprises operating in developing countries'. At the same time, it also
determines the possibilities for host country based individuals and communities
1139 Marx et al ibid at at 112. 1140 Ibid at 113. 1141 Ibid at 113. 1142 Ibid at 114.
280
who have suffered harm as a result of the activities of EU-based businesses with
international operations to ensure, through this type of litigation, that the level or
protection of their environmental and human rights interests is adequate and not
fundamentally different from that afforded to those living in the EU home
countries of the business enterprises involved'.
In case of a possible future EU intervention, consideration should be given as to how to
ensure that the (newly created) EU standard of conduct for companies would be applied
in EU member states’ courts if the harm takes place in a third country. In line with the
recommendations from the above-mentioned study, one option would be to indicate
expressly that the provisions of the EU law should be considered as overriding
mandatory provisions, and as such, applied regardless of the otherwise applicable law.
Overriding mandatory provisions have been defined as:1143
[P]rovisions the respect for which is regarded as crucial by a country for
safeguarding its public interests, such as its political, social or economic
organisation, to such an extent that they are applicable to any situation falling
with their scope, irrespective of the law otherwise applicable to the contract
under this Regulation.
This is the approach that has been taken in the Swiss Responsible Business initiative
which states that its provisions “apply irrespective of the law applicable under private
international law”.1144 Similarly, the unofficial outline for a German draft law discussed
amongst stakeholders for due diligence in supply chains contains a provision to ensure
the applicability of the due diligence duties on German companies in transnational civil
liability claims irrespective of the foreign applicable law.1145
7.6 Transitional period
In the May 2018 European Parliament report on sustainable finance which forms the
background to this study, it mentions a due diligence requirement which would apply
“after a transitional period”.1146 As is evidenced in the Market Practices section,
stakeholders have similarly referred to the usefulness of a transitional period, to allow
time for companies to implement standards into practice. For example, the French Duty
of Vigilance law allows for legal action to be taken only after the submission of reports
for the financial year of 2018 (the first full financial year after the law came into force in
early 2017). The Dutch Child Labour Due Diligence Law also provides for a transitional
provision giving companies “five years to reduce or remedy any potential offending
supply commitments entered into prior to the effective date of the Act”.1147
Whereas it was highlighted that this may delay legal certainty provided by courts, some
level of clarity about the implementation of the standard could be provided in the interim
through non-binding guidance accompanying any legal duty.
7.7 Mandatory due diligence as part of a package of measures
Stakeholders indicated that mandatory due diligence legislation would need to be part of
a “smart mix” of measures which would need to be implemented both by the EU and its
1143 Article 9 of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law
applicable to contractual obligations (Rome I). 1144 SCCJ Initiative Text above n 493. 1145 Norton Rose Fulbright, ”Compliance update - Germany” (March 2019), available at:
https://www.nortonrosefulbright.com/en-de/knowledge/publications/501f3fbf/compliance-update-germany. 1146 European Parliament Report on Sustainable Finance, (2018/2007(INI)), available at:
http://www.europarl.europa.eu/doceo/document/A-8-2018-0164_EN.html at para 6. 1147 John Arvanitis and Kevin Braine, “Breaking Down the Dutch Child Labor Due Diligence Act” (2 July 2019), available at:
https://www.kroll.com/en/insights/publications/dutch-child-labor-due-diligence-act.
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Member States in order to have a greater impact.1148 The UNGPs explicitly envisaged the
need for states to consider a smart mix of measures and John Ruggie, the author of the
UNGPs, reasserted this in a letter he recently wrote as a response to a public letter by
Swiss business associations regarding their position on the Swiss Responsible Business
Initiative that:1149
Guiding Principle 3 and its extensive commentary emphasize that states are
expected to adopt a mix of measures - voluntary and mandatory, national and
international - to foster business respect for human rights in practice.
A recent report by Fern exploring the regulatory options for the EU in order to achieve
sustainable cocoa supply chains also advocate for a “package of options to be
implemented by the EU and its Member States”.1150 The report makes a number of
suggestions in this respect, which could be extended beyond the cocoa sector, and
include:
The negotiation of bilateral agreements with producing countries, and the
provision of financial and capacity-building assistance to achieve the agreed
standards for production in the producer country and improve standards of
governance and law enforcement.1151
The development of “carding systems” through which the EU enters into
dialogues with countries that export certain goods to the EU and issues yellow
cards (warning) or red cards (import ban or notification of high risk) to those
countries not combatting illegal behaviour in the supply chain, based on the EU
Illegal, Unreported and Unregulated (IUU) Fishing Regulation.1152
Setting expectations for Member States to use their public procurement policies in
order to set incentives for companies in terms of human rights and environmental
standards and promote responsible sourcing.1153
Revising or clarifying EU competition law to “allow businesses greater freedom to
collaborate for sustainability purposes, factor in externality costs and, in
particular, discuss and address low prices paid to farmers”.1154
Other measures could also include in particular:
Setting expectations for Member States to establish clear guidelines for State-
based financial institutions.
Taking measures “to support producers in developing countries to improve their
environmental standards and human rights practices and to improve
livelihoods.”1155
8. Discussion of strengths and weaknesses of the options identified
In the following, we discuss the perceived strengths and weaknesses of the options
identified, in relation to one another and the no change / baseline scenario. These
1148 UNGP 3 and its commentary 1149 BHHRC, above n 854. 1150 Brack, above n 978 at 8. 1151 Ibid at 6. 1152 Ibid. 1153 Ibid. 1154 Ibid at 7. 1155 ClientEarth and Global Witness, above n 814 at 3.
282
strengths and weaknesses are based on the perceptions of stakeholders identified during
the surveys and interviews, the country reports and the literature.
The following table elaborates for each option:
Description of the option
Strengths identified
Weaknesses identified
Relevant country examples
Experiences at country level
General conclusions
283
Regulatory Options Perceived Strenghts and Weaknesses
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
1. No policy
change
No changes in
regulation at EU level
for companies on
undertaking due
diligence through the
supply or value chain.
Expectation that legal
developments around
mandatory due diligence
in Member States will
continue.
No strengths
identified.
Do not address the
weakness of current
legislative frameworks
and the perceived need
for action at the EU level
(see Market Practices
and Problem Analysis),
with an increasing level
of fragmentation of due
diligence requirements
across sectors, size of
companies, countries
and area of application
Lack of legal certainty for
businesses for
requirements regarding
supply chain due
diligence.
See
Regulatory
Review.
See Market
Practices and
Problem Analysis.
No benefits
identified / overall
discontent with
status quo.
2. New
voluntary
guidelines
New voluntary
guidelines at EU level
for companies on
undertaking due
diligence through the
supply chain.
No strengths
identified by
majority of
stakeholders.
Limitations in changing
corporate practices.
Multiplication of and
confusion with existing
and established
voluntary guidelines.
Continued fragmentation
(as in Option 1).
Lack of legal certainty,
lack of level playing field
for businesses.
Multiple, see
Regulatory
Review.
See Problem
Analysis.
Limited perceived
benefits / already
enough voluntary
guidance.
284
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
3. New
reporting
requirement
New regulation at EU
level requiring
companies to report on
the steps they have
taken to identify,
address, prevent and
mitigate any adverse
human rights and
environmental impacts
in their own operations
or within the operations
of third-party business
relationships (including
the supply or value
chain).
Draws attention to
issues within
companies.
Limited impacts on
corporate behaviour.
No enforcement.
No remedy.
Continued fragmentation
of standards that go
beyond reporting.
Lack of legal certainty for
businesses regarding
substantive requirements
for supply or value chain
due diligence that go
beyond reporting.
EU Non-
Financial
Reporting
Directive
UK Modern
Slavery Act
2015
Studies have
shown that the
impact of existing
reporting
requirements on
corporate practices
has remained very
limited to date.
Focus on material
risks to company
rather than risks to
people and planet.
Some perceived
benefits.
4. Mandatory
due diligence
New regulation which
requires companies to
undertake mandatory
due diligence in their
own operations and
through the supply or
value chain.
Creates a level
playing field,
provides legal
certainty,
harmonisation,
non-negotiable
standard to
increase leverage
with third parties.
Legal duty to
incentivise
implementation by
companies.
Depends on sub-option,
see below.
French Duty
of Vigilance
Law.
France: Study of
the first vigilance
plans suggests
that they have
focused on the
risks to the
business rather
than the risks to
other
stakeholders.
First legal actions
brought, court
decisions to clarify
Most perceived
benefits indicated
by stakeholders.
285
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
Potential access to
remedy.
Aligns with UNGPs
and OECD
Guidelines.
(See Intervention
Logic).
content of
expectations.
4.1 Applying
only to certain
sector(s)
Mandatory due diligence
regulation would only
apply to certain sectors.
Take into
consideration the
specificity of certain
sectors.
Fails to protect against
harms taking place
outside of the sector(s).
Fragmentation
continues.
Problematic for
companies operating
across sectors / sourcing
from or business
relationships with
different sectors along
value chain.
Identification of “high
risk” sectors problematic
given presence of human
rights and environmental
risks in all sectors.
EU timber
regulation
EU conflict
minerals
regulation
EU Timber and
Conflict Minerals
Regulations:
Different focus,
related to imports
and access to
European market.
Overall stakeholder
preference for
cross-sectoral
approach, which
takes into account
the specificities of
the sector in its
application.
286
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
Falls short of UNGPs due
diligence which applies
to all companies
regardless of sector.
4.2 Applying to
companies
across all
sectors
Mandatory due diligence
regulation would apply
across all sectors
Provides general
standard:
Legal certainty and
clarity
Meets UNGPs: risks
in all sectors
Enforcement to cover
wide scope.
French Duty
of Vigilance
Law
Dutch Child
Labour Due
Diligence Law
France: First legal
actions brought
against companies
in variety of
sectors.
Cross-sectoral
approach
preference of
stakeholders
overall.
4.2 (a) Applying
to defined set of
large companies
only
Mandatory due diligence
regulation would only
apply to larger
companies
Larger companies
likely to have more
resources and
expertise to
undertake due
diligence.
Due diligence of
large companies
would cover
activities of small
companies in their
supply or value
chain.
Falls short of UNGPs due
diligence which applies
to all companies
regardless of size.
Fails to cover small
companies may also
have severe impacts.
French Duty of Vigilance Law
France: First legal
actions brought,
some allegations
relating to
activities of
subsidiaries and
suppliers of large
French companies.
Perception amongst
small companies
that large
companies have
more knowledge
and resources for
due diligence.
Perception amongst
large companies
that small
companies could
pose severe risks
and should be
required to do due
diligence.
4.2 (b) Applying
to all companies
regardless of
size (including
Mandatory due diligence
regulation would apply
to all companies,
including SMEs
Standard is
context-specific so
allows for
priorisation of most
SMEs may not have the
same resources as larger
companies to undertake
due diligence
UK Bribery
Act 2010
Swiss
UK: Two thirds of
SMEs had
knowledge of UK
Bribery Act,
Overall stakeholder
preference for duty
which applies
regardless of size.
287
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
SMEs) severe risks; due
diligence
expectations
determined by size,
resources and risks.
Aligns with UNGPs:
SMEs may not have
the same
resources, but may
have severe
impacts.
counter-
proposal (not
yet law)
applies to
SMEs in “high
risk” sectors.
knowledge highest
with those aware
of legal liability
provisions.
4.2(c): General
duty applying to
all business plus
specific
additional
obligations only
applying to
large companies
General duty applying to
all business, including
SMEs, plus additional
obligations only
applying to large
companies.
The additional obligation
is discussed with
reference to the
example of possible
additional obligations for
large companies relating
to climate change.
Possible additional
clarification of
individual (large)
companies’ duties
with respect to
climate change due
diligence.
Possible difficulty in
distinguishing specific
climate change due
diligence obligations
(applicable only to large
companies) from those
climate impacts that
need to be considered as
part of general duty.
EU non-
binding
guidance on
climate-
related
information
Dutch OECD
National
Contact point
case
Claims in
terms of
French Duty
of Vigilance
Law.
Extremely new
developments.
Additional duty to
be defined.
4.3 In order to be Would contribute to Need to set up See two sub- See two sub- Necessary for duty
288
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
Accompanied by
oversight
and/or
enforcement
mandatory, due
diligence regulation
would be accompanied
by an oversight and/or
enforcement
mechanism.
effectiveness of the
regulatory
regulation.
enforcement
mechanism(s).
options
below.
options below. to be mandatory.
Two sub-options not
mutually exclusive,
can operate
together.
4.3 (a)
Mechanisms for
judicial and non-
judicial
remedies
Mandatory due diligence
regulation would be
accompanied by
mechanisms for judicial
and / or non-judicial
remedies
Would provide
remedy for victims.
No need to set up a
State-based
oversight body.
Burden on public courts
and other bodies
involved in remediation.
Burden on companies
and affected right-
holders to use
mechanisms for judicial
and non-judicial
remedies.
Other barriers to access
to remedy (costs, legal
representation) may
result in low number of
claims.
French Duty
of Vigilance
Law
Dutch Child
Labour Due
Diligence Law
France: First legal
actions instituted.
Netherlands: New
law not yet
enforced.
Benefit of providing
remedy to victims,
identified by
stakeholders as key
shortcoming of
status quo.
4.3 (b) State-
based oversight
body and
sanction for
non-compliance
Mandatory due diligence
regulation would be
accompanied by a
State-based oversight
body and sanction for
non-compliance.
Level playing field
depending on
enforcement.
Need to set up oversight
and/or enforcement
mechanism.
Potential need to oversee
due diligence of all
(large) companies: may
be under-resourced,
leading to limitations in
UK Bribery
Act 2010
Dutch Child
Labour Due
Diligence Law
UK: Bribery Act
perceived to be
effective to drive
due diligence
practices despite
low number of
prosecutions and
resources.
Potentially effective
to incentivise
implementaiton, but
costly.
Fines paid by
companies may
offset costs
involved.
289
Option Description Strengths
identified
Weaknesses identified Relevant
country and
EU
examples
Experiences at
country level
Conclusions
effectiveness.
Does not provide remedy
for those affected.
290
V ASSESSMENT OF OPTIONS
The assessment of regulatory options was undertaken by LSE Consulting, and in
particular by Matthias Bauer, Hanna Deringer, Daniela Baeza-Breinbauer, and Francisca
Torres-Cortés.
1. Literature Review
The following section reviews existing impact assessments on similar legislative
initiatives, studies, reports and academic literature to provide an overview of results
from other studies which can inform the assessment of costs and benefits of the
regulatory options at issue. The literature review covers potential economic impacts on
companies (costs and benefits), company-level competitiveness and SMEs in particular.
Moreover, it provides a review of existing studies on social and environmental impacts,
impacts on human rights as well as public administrations in the EU and its Member
States.
1.1 Economic Impacts
The objective of the economic impact assessment is to quantify economic impacts of the
proposed regulatory options as far as possible in order to enable the comparison
between economic costs and economic benefits resulting from a new regulation.
However, as the literature review demonstrates, it is not always possible to provide
reliable quantitative estimates for all types of costs and benefits which need to be
considered and discussed. Quantitative estimates are primarily available for economic
costs of individual companies. In contrast, while there is also evidence regarding the
expected benefits for companies resulting from sustainability measures, these are
generally more difficult to quantify in terms of their magnitude. Apart from the company-
level impacts, which provide the basis for the estimations of economic costs and
benefits, we also review potential impacts on company-level competitiveness, impacts on
SMEs in particular and conclude by discussing industry and economy-wide economic
impacts.
1.1.1 Company-level Costs
The French Duty of Vigilance Law, which is the leading example of a law requiring due
diligence as a standard of care for human rights and environmental harms as set out in
the mandate for this study, has not been in force for long enough to have generated
information regarding implementation costs for companies. However, company-level
impact assessments covering various aspects that are related to the subject of this
impact assessment are available for the EU Timber Regulation, EU’s Non-financial
Reporting Directive, the EU Conflict Minerals Regulation, and Section 1502 of the US
Dodd-Frank Act (US DFA). While the EU’s Non-financial Reporting Directive is primarily
about the disclosure of certain non-financial information, both the US and the EU conflict
minerals and timber policies include due diligence procedures for relevant suppliers as
well as several disclosure obligations. The major features and legal obligations of these
regulations, e.g. data collection, disclosure and reporting requirements, are outlined in
Table 0.1.
291
These comparative impact assessments as considered as a result of the absence of
sufficient evidence relating to the impacts of the French Duty of Vigilance Law. However,
the particular relevance of impacts of these other laws should be understood as being
limited insofar as they contain legal duties which are different in nature to due diligence
is a standard of care as envisioned in the French Duty of Vigilance Law, which informs
the mandate of this this study.
Table 0.1: Major features and legal obligations of related regulations
Law/regulation Legal requirements for companies
EU Timber
Regulation1156
The EU Timber Regulation (EUTR) came into force in March 2013.
It aims to reduce illegal logging by ensuring that no illegal timber or
timber products can be sold in the EU. It applies to wood and wood
products being placed for the first time in the EU market, and defines
‘legal’ as timber produced in compliance with the laws of the countries
where it is harvested. The 28 EU Member States are responsible for
laying down effective, proportionate and dissuasive penalties and for
enforcing the regulation.1157
The EUTR sets out three key obligations:
Placing illegally harvested timber products derived from such
timber on the EU market for the first time, is prohibited.
EU operators – those who place timber products on the EU
market for the first time – are required to exercise due
diligence.
Traders – those who buy or sell timber and timber products
already on the market – are required to keep information
about their suppliers and customers to make timber easily
traceable.
Operators can develop their own due diligence systems or use one
developed by a monitoring organisation.1158 The regulation defines
due diligence based on three elements:
Information – Operators must have access to information
describing the timber and timber products, including details of
their origin, suppliers, and information on compliance with
national legislation.
Risk assessment – Based on the information identifies above
and the criteria set out in the regulation, operators should
assess the risk of illegal timber in their supply chains.
Risk mitigation – When the assessment shows that there is a
risk of illegal timber in the supply chain, that risk can be
mitigated by requiring additional information and verification
from the supplier.
EU Non-financial
Reporting
Directive1159
This EU Directive requires large companies to disclose certain
information on the way they operate and manage social and
environmental challenges. EU rules on non-financial reporting only
1156 Timber Regulation (2010), Regulation (EU) 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market. Available at: https://eur-
lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32010R0995&from=EN 1157 DG Environment. (2019). Timber Regulation. [online] Available at:
https://ec.europa.eu/environment/forests/timber_regulation.htm 1158 DG Environment. (2013). What does the law say? - EU timber regulation 2013. [online] Available at:
https://ec.europa.eu/environment/eutr2013/what-does-the-law-say/index_en.htm
292
apply to large public-interest companies with more than 500
employees. This covers approximately 6,000 large companies and
groups across the EU, including listed companies, banks, insurance
companies and other companies designated by national authorities as
public-interest entities.
Under Directive 2014/95/EU, large companies have to publish reports
on the policies they implement in relation to environmental protection,
social responsibility and treatment of employees, respect for human
rights anti-corruption and bribery, diversity on company boards (in
terms of age, gender, educational and professional background).
Directive 2014/95/EU gives companies significant flexibility to disclose
relevant information in the way they consider most useful. Companies
may use international, European or national guidelines to produce
their statements. Since 2017, voluntary guidelines by the EC exist on
how to disclose environmental and social information.1160
EU Conflict Minerals
Regulation1161
EU importers of tin, tantalum, tungsten and gold must check
what they are buying, to ensure it has not been produced in a way
that funds conflict or other related illegal practices.1162 The regulation
requires importers to follow a five-step framework which the
Organisation for Economic Co-operation and Development (OECD) has
laid out in a document called 'Due Diligence Guidance for Responsible
Supply Chains from Conflict-Affected and High-Risk Areas' (OECD
Guidance). These steps require an importer to:
1. ESTABLISH STRONG COMPANY MANAGEMENT SYSTEMS
2. IDENTIFY AND ASSESS RISK IN THE SUPPLY CHAIN
3. DESIGN AND IMPLEMENT A STRATEGY TO RESPOND TO IDENTIFIED RISKS
4. CARRY OUT AN INDEPENDENT THIRD-PARTY AUDIT OF SUPPLY CHAIN DUE
DILIGENCE
5. REPORT ANNUALLY ON SUPPLY CHAIN DUE DILIGENCE
Section 1502 of the
US Dodd-Frank Act
(US DFA)1163
The US Conflict Minerals Act (Section 1502) in the 2010 Dodd-Frank
Wall Street Reform and Consumer Protection Act requires US
registered companies to disclose whether the minerals they source
1159 Non-financial Reporting Directive (2014). Directive 2014/95/EU of the European Parliament and the Council of 22 October
2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large
undertakings and groups. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0095&from=DE 1160 Commission guidelines on non-financial reporting. Available at https://ec.europa.eu/info/publications/170626-non-
financial-reporting-guidelines_en 1161 Conflict minerals Regulation (2017). Regulation (EU) 2017/821 of the European Parliament and of the Council of 17 May
2017 laying down supply chain due diligence obligations for Union importers of tin, tantalum and tungsten, their ores, and gold
originating from conflict-affected and high-risk areas. Available at https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:32017R0821&from=DE 1162 European Commission (2019). The regulation explained. Available at http://ec.europa.eu/trade/policy/in-focus/conflict-
minerals-regulation/regulation-explained/ 1163 The US Conflict Minerals Act (Section 1502) in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires US registered companies to disclose whether the minerals they source originate from the Democratic Republic of
Congo or its neighbouring countries. The four minerals from DRC mines or adjoining countries defined as “conflict minerals” in
Section 1502(e)(4) of the Act are cassiterite (tin), columbite-tantalite (tantalum) and wolframite (tungsten) – also referred to
as the “3Ts” and gold. Companies that manufacture products containing these conflict minerals are required to document if any
3TG in their products have been purchased from Covered Countries where armed groups are suspected of committing human
rights violations.
293
originate from the Democratic Republic of Congo or its neighbouring
countries.1164 The goal of the law is to provide transparency of
material origin and allow customers to make purchasing decisions
based on that information. The three-step procedure to be followed is:
6. ASSESSMENT WHETHER CONFLICT MINERALS ARE NECESSARY TO
FUNCTIONALITY OR PRODUCTION OF PRODUCTS MANUFACTURED IN THE
REPORTING YEAR,
7. CONDUCTING A REASONABLE COUNTRY OF ORIGIN INQUIRY TO DETERMINE
WHETHER ANY ORIGINATE IN THE DEMOCRATIC REPUBLIC OF CONGO OR
ADJOINING COUNTRIES,
8. IF SO, CONDUCTING SUPPLY CHAIN DUE DILIGENCE IN ACCORDANCE WITH
INTERNATIONALLY RECOGNISED DUE DILIGENCE FRAMEWORK AND ISSUE
A CONFLICT MINERALS REPORT (CMR)
As concerns the company-level costs and administrative burden, the impact assessments
of these policies have some commonalities, but also show differences in the
methodologies applied by the authors. The studies’ shortages generally include a lack of
publicly available industry data and a high variation in the quantitative and qualitative
information collected through surveys and consultations. Therefore, the figures provided
should be considered as broad estimates and the results should be interpreted with
caution.
Regarding the studies’ commonalities, numerical cost estimates are usually provided for
one-time costs resulting from preparatory measures needed to comply with the
regulations as well as recurrent costs. Costs are usually expressed in annual numbers on
a per company basis. Some studies aggregate these numbers to arrive at a total cost for
all companies affected by the respective regulation.
One-time costs usually include internal staff cost, fees for external advisory services and
costs related to changes in ICT systems and procedures. Recurrent costs include staff
costs related to the collection of required information, the preparation of reports, the
verification of information, the disclosure of information, and/or the publication of
reports. In addition, fees for external consultants as well as costs of external auditors
feed into the estimation of regulation-induced recurrent costs.
Cost estimates are either taken from the companies’ replies gathered through
consultations and surveys or estimated by multiplying a given number of working hours
required (usually stated by the business respondents) and labour costs per hour (usually
based on available industry intelligence), depending on the administrative procedures
prescribed by the intended regulation.
While the impact assessment for the obligations from Section 1502 of the US Dodd-
Frank Act focuses on specific legal obligations, the EU’s assessments of the economic
impact of the Non-financial Reporting Directive and the Conflict Minerals Regulation
1164 Thousands of manufacturers – ranging from Fortune 500 companies to companies with 10 million USD in annual sales – in
the industrial, aerospace, healthcare, automotive, chemicals, electronics/high tech, retail, and jewellery industries are
consumers of these metals. All these companies are affected by the new law. See also OECD (2016). Quantifying the Costs,
Benefits and Risks of Due Diligence for Responsible Business Conduct Framework and Assessment Tool for Companies- June
2016. Available at https://mneguidelines.oecd.org/Quantifying-the-Cost-Benefits-Risks-of-Due-Diligence-for-RBC.pdf
294
analyse different policy scenarios and options respectively. A brief explanation of the
methodologies applied in the assessments of the EU Timber Regulation, the EU Non-
financial Reporting Directive and the EU Conflict Minerals Regulation as well as a break-
down of the analysed options is provided in Table 8.1. These studies are relevant
examples or due diligence-related assessments that consider policy options that
gradually increase obligations for the different stakeholders aiming to strengthen positive
effects on CSR practices, human rights and the environments.
295
Table 8.1: Overview of options analysed in relevant EU impact assessments
Methodology for the assessment of the economic
impact of the EU Timber Regulation1165,1166
Methodology for the assessment of the economic
impact of the Non-financial Reporting
Directive1167
Methodology for the assessment of the economic
impact of the EU Conflict Minerals Regulation1168
The study estimated the average costs of a legality
control system through country case studies
considering three different stages within the supply
chain. Secondly, it analysed the potential shifts of
trade flows from one region to another and the impact
on prices of wood and wood products using a partial
equilibrium model for forest and forestry industries.
Additionally, the estimated environmental impacts in
terms of the change in the volume of illegal logging.
The study analysed 6 policy options; the baseline
option is the no policy-change scenario and the other
options would be added up to that scenario:
Baseline/minimum option – implementation of
the Voluntary Partnership Agreements, a
licensing scheme that provides more certainty
to EU operators and six timber producing
countries.
Additional option 1 – Expanded coverage of
the bilateral approach through FLEGT VPAs to
6 additional countries.
Additional option 2 – Further development of
The initial impact assessment from 2014 focuses on
the effects of improved disclosure of non-financial
information by EU companies as part of a broader set
of EU initiatives on CSR. The assessment is
accompanied by a study prepared by the Centre for
Strategy and Evaluation Services, which provides a
qualitative analysis of current non-financial reporting
practices as well as a cost/benefit assessment based
on a survey. In this study, the following methodology
is applied.
The study analyses 3 policy options:
Option 1 – Requires a statement in the
Annual Report, i.e. possibility of strengthening
the existing requirement to disclose a
statement on non-financial information in the
Annual Report.
Option 2 – Requirement of a Detailed Report,
with sub-option for mandatory reporting and
different reporting obligations.
Option 3 – Mandatory EU Standard, which
would constitute a framework for disclosing
non-financial information.
The study quantifies the compliance costs for
businesses subject to an EU responsible sourcing
initiative. The authors combine qualitative
assessments with quantitative methods. It is
recognised that the study, like similar studies, suffers
from data limitations. The study consists of two main
parts: the first part provides a description of global
supply chains and trends for relevant commodities.
The second part outlines the results of a
comprehensive user survey. The analysis is
supplemented by related literature, databases and
industry intelligence. The cost estimates given by the
study are based on the survey results. The authors
distinguish between two cost types: initial costs, e.g.
one-time efforts for companies to be able to comply
with conflict minerals reporting, and ongoing costs of
compliance. The authors highlight that many
respondents indicated only very rough estimates.
Some stated that cost estimates were not possible at
the time of the survey. One survey participant
indicated very high costs, while many others indicated
much lower costs. A distinction was made between
SMEs and large enterprises with 250 and more
1165 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a Regulation of the European Parliament and the Council determining the obligations of operators who make timber and
timber products available on the Market. IMPACT ASSESSMENT Report on additional options to combat illegal logging. Available at: https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf 1166 Indufor (2008). Assessment of the impact of potential further measures to prevent the importation or placing on the market of illegally harvested timber or products derived from such timber. Final Report. [online]
Helsinki, Finland: Indufor in association with European Forest Institute (EFI). Available at: https://ec.europa.eu/environment/forests/pdf/ia_report.pdf [Accessed 10 Sep. 2019]. 1167 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives
78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52013SC0127. 1168 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due
diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. PART 3 (see first part of Annex III to the Impact Assessment).
Full external report available at https://publications.europa.eu/en/publication-detail/-/publication/dced6d04-92fb-4a20-a499-4dad9974aee7 01aa75ed71a1.0001.01/DOC_3&format=PDF.
296
voluntary measures by the private sector,
such as codes of conduct and forest
certification schemes.
Additional option 3 – Broder measures to
prevent the importation of illegally harvested
timber by declaring it illegal regardless of the
level of risk in trading.
Additional option 4 – Prohibition on the
placing on the EU market of illegally
harvested timber, including imported forest
products and those produced in the EU.
o Sub-option 4A – Prohibition on
trading and possession of timber and
timber products harvested in breach
of the laws of the country of origin.
o Sub-option 4B – Requiring that only
legally harvested timber and timber
products to be placed on the market.
Additional option 5 – Legislation which
requires due diligence by all timber traders to
ensure that they trade in legally harvested
timber.
employees. In addition, publicly traded companies,
which have different reporting requirements, have
been analysed separately. Additional questions were
raised about the impact on local operators, e.g.
expected ‘economic losses for local operators’, ‘cost or
price increases’, ‘increased illegal trade and
corruption’.
The study analyses 6 policy options:
Option 1 – Standalone EU Communication
Option 2 – ‘Soft-law’ approach combining
option 1 with a Council Recommendation.
Option 3 – Regulation establishing obligations
under an ‘EU responsible importer’ certification
based on OECD Guidance – VOLUNTARY. The
Regulation relies on the OECD Guidance to
define obligations for EU importers that opt to
be self-certified as responsible importers of
tin, tantalum and tungsten ores and metals,
and gold, on the basis of a self-declaration of
compliance.
Option 4 – Regulation establishing obligations
under an ‘EU responsible importer’ certification
based on the OECD Guidance – MANDATORY.
This option combines the measures described
under Option 1, with a compulsory version of
the Regulation described in Option 3 under
which all EU importers of tin, tantalum and
tungsten ores and metals, and gold, would be
subject to the obligations defined under the
Regulation.
Option 5 – Directive establishing obligations
for EU-listed companies based on the OECD
Due Diligence Guidance. This option combines
the measures described under Option 1, with a
Directive targeting almost 1,000 EU-listed
companies using tin, tantalum, tungsten and
297
gold, regardless of origin, in their supply
chain.
Option 6 – Prohibition of imports when EU
importers of ores fail to demonstrate
compliance with OECD Guidance) – import
ban. This option consists of the measures
described under Option 1, and in addition it
would require EU importers to mandatorily
demonstrate compliance with the OECD
Guidance. Providing evidence on compliance
to Member States' customs authorities,
importers will be eligible to access the EU
market.
298
Annexure 4 provides the results of the studies displayed in Table 1.2. Depending on the
methodology chosen by the respective authors, cost estimates are provided for (see
PART IV Annexure D for more details on the different types of company-level costs):
One-time costs related to changes to corporate compliance policies (see Annexure
D, Table 1)
One-time costs for the set-up and operation of necessary IT systems (see
Annexure D, Table 2)
Recurrent costs related to audits (see Annexure D, Table 3)
Recurrent costs for data collection, e.g. verifications that suppliers are providing
credible information (see Annexure D, Table 4)
Recurrent costs of filing necessary forms (see Annexure D, Table 5)
Total first-year costs (see Annexure D, Table 6)
Total recurrent costs in the following years (see Annexure D, Table 7)
It should be noted that the cost estimates per type of cost vary, sometimes significantly,
depending on information gathered from individual companies, differences in hourly
labour cost estimates and the way final numbers have been aggregated.
At least five different studies are available for the assessment on the economic impacts
of Section 1502 of the US Dodd-Frank Act, implying that these studies’ results can be
checked against each other for robustness. Studies other than those commissioned by
the European Commission are not available for the economic impacts of the EU’s due
diligence policies. Accordingly, as indicated by Bayer and de Buhr for the assessment of
the impact of Section 1502 of the US Dodd-Frank Act, the EU studies may over- or
underestimate the impact of the regulations analysed by the authors.1169
Most studies provide ranges of estimates for different types of costs and different sizes
of companies, e.g. large companies versus SMEs or companies whose revenues exceed
certain revenue thresholds.
A relatively detailed break-down of cost estimates is given in the economic impact
assessment of the EU’s Non-financial Reporting Directive, which, however, does not
provide for detailed value chain due diligence requirements.
Table 8.2 provides a summary of the costs by company for different costs types as
estimated for the EU’s Non-financial Reporting Directive 1170,1171. For large companies,
the cost burden is estimated to range from 155,000 to 604,000 EUR. For SMEs, the cost
burden is estimated to range from 8,000 to 25,000 EUR per company and year. It should
be noted though that the costs listed in the study only relate to companies’ reporting
activities, not to due diligence activities. For example, no costs are listed for companies’
engagement with suppliers, code of conduct drafting and compliance monitoring,
creating and implementation of human rights policies, grievance mechanisms, or
remediation.
1169 Bayer and de Buhr, C. 2011. A Critical Analysis of the SEC and NAM Economic Impact Models and the Proposal of a 3rd
Model in view of the Implementation of Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
LA: Tulane University. Available at https://lawprofessors.typepad.com/files/tulane-study.pdf 1170 European Commission (2013). COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives
78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and
groups. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013SC0127 1171 OECD (2016). Quantifying the Costs, Benefits and Risks of Due Diligence for Responsible Business Conduct Framework and
Assessment Tool for Companies- June 2016. Available at https://mneguidelines.oecd.org/Quantifying-the-Cost-Benefits-Risks-
of-Due-Diligence-for-RBC.pdf
299
These numbers need to be contrasted with assessments that have been conducted by
business associations: A study from the Confederation of British Industry (CBI 2013)
estimates cost of 30,000 GBP per company (approximately 40,000 EUR as of 2011) in
the first year. In addition to these numbers, according to the OECD (p.23) “[t]he French
business submission to the EC Consultation on non-financial reporting reported costs
between 50,000 and 200,000 EUR per company for data collection, internal processing
and consolidation; 50,000 to 100,000 EUR for data publication in the management
report; and the largest cost (between 100,000 and 750,000 EUR) for external
verification of reporting processes (mandatory in France as of 2012) and of CSR data (on
a voluntary basis), adding up to total annual costs per company between 200,000 and
over 1 million EUR.” 1172
Table 8.2: Summary of the costs by company for different costs types as
estimated for the EU’s Non-financial Reporting Directive1173
Large Companies SMEs
Training costs Up to 18 days (often also no
training or training on the job)
Up to 5,000 EUR
n/a
Collection of New Data (internal staff)
Days 35 to 100 days n/a
Cost 227 EUR per day:
8,000 EUR and 23,000 EUR
n/a
Report Drafting (internal staff)
Days 80 to 480 days 15-20 days
Cost Costed at 227 EUR per day:
Between 18,000 and 109,000
EUR
Cost at 227 EUR per day:
Between 3,000 and 5,000 EUR
Report Design (usual
external cost)
Between 10,000 and 100,000
EUR
Between 1,000 and 2,000 EUR
Report processing (external
cost)
Up to 97,000 EUR Under 20,000 EUR
Report Publication (depending on publishing strategy – internet or printed)
Days 2 to 50 days 2 days
Cost Between 1,000 to 192,000 EUR
(printed version)
Between 10,000 and 35,000
EUR (online)
Overall: Between 1,000 and
Under 1,000 EUR
1172 Ibid. 1173 CSES (2011). Framework Contract for Evaluation and Impact Assessment activities of Disclosure of non-financial
information by Companies. Final report. Centre for Strategy and Evaluation Services, UK. Available at
http://ec.europa.eu/finance/accounting/docs/non-financial-reporting/com_2013_207-study_en.pdf. And OECD (2016).
300
131,000 EUR
External Assurance/Audit Between 22,000 and 114,000
EUR
n/a
TOTAL
Days
Cost Between 155,000 and 604,000
EUR
Between 8,000 and 25,000
EUR
Available impact assessments indicate that the potential financial cost burden of
reporting requirements varies widely across companies depending on size, value-chain
complexity and other sector characteristics.
As concerns the overall cost magnitude of the administrative burden, available studies
demonstrate that the concrete cost impact critically depends on how costly it is for
companies to set up additional resources and new organisational procedures to comply
with the regulations. For example, the estimated total cost impact resulting from the
EU’s Conflict Minerals Regulation is found to be much lower than the cost impact
estimated for US companies that have to comply with the US’ conflict minerals policies.
An explanation might be that the EU’s regulation targets only upstream supplies such as
smelters and refiners, while the US regulations require a much more diverse range of
publicly listed companies to check and report on their supply chains. For the latter group,
according to the impact assessments, complying with the (then new) regulations turned
out to cause much higher additional costs than for companies that have close affiliations
with minerals suppliers. Another explanation might be that the US law is more strictly
enforced through the US Securities and Exchange Commission (SEC). As a result, the
stakes might be higher for US companies, incentivising them to take more actual due
diligence steps, which result in higher costs.
As reporting, data collection and auditing requirements are different for all three
regulations, it is generally difficult to compare the overall impact of these requirements.
The studies’ results suggest, however, that the administrative burden resulting from the
reporting requirements of the EU’s Non-Financial Reporting Directive is in many cases
higher than the cost burden estimated for the US conflict minerals regulations, and
substantially higher than the cost burden estimated for the EU Conflict Minerals
Regulation. Depending on the coverage required by the laws, the cost burden of the
verification of information collected from third parties can lead to a substantial cost
burden (as, for example, indicated by the French business submission to the EC
Consultation on non-financial reporting).1174
Based on the impact assessments available, it is generally difficult to objectively assess
the proportionality of the measures (and options) analysed as pecuniary estimates are
not available for the benefits of the measures. As concerns the magnitude of the cost
impact of the proposed measures, the compliance costs generally increase with the legal
requirements (demands) of the regulation. The impact assessments also stress that
companies not directly affected by the regulations are likely to be impacted indirectly
1174 OECD (2016). Quantifying the Costs, Benefits and Risks of Due Diligence for Responsible Business Conduct Framework and
Assessment Tool for Companies- June 2016. Available at https://mneguidelines.oecd.org/Quantifying-the-Cost-Benefits-Risks-
of-Due-Diligence-for-RBC.pdf
301
through supply chain effects. Quantitative estimates for these ‘second rounds’ effects
are, however, missing in these studies.
1.1.2 Company-level Benefits
In order to compare the expected costs for EU companies from the proposed regulatory
options with the possible economic benefits resulting from such policies, a
comprehensive literature review has been conducted to review existing studies which
assess and estimate the potential economic benefits. Due to the lack of studies which
focus specifically on due diligence for human rights and environmental harms, such as
contained in the French Duty of Vigilance Law, the review covers mainly studies which
refer to general concepts such as sustainability reporting or corporate social
responsibility (CSR) activities or studies which use environmental, social, and
governance (ESG) performance as an indicator. Furthermore, it is also important to point
out that most studies assess business practices rather than impacts from regulations and
laws. We note that the impacts of due diligence practices may not be identical to the
impacts of due diligence laws and that they would only be comparable if a law or
regulation would lead to the same business practices. In the absence of studies which
assess specifically impacts from similar regulations and laws, the results from these
general studies will be used as far as possible for the assessment of the different
regulatory options in this assessment, but accompanied by a critical discussion of their
suitability and appropriateness.
In general, it is difficult to find studies, which quantify the magnitude of the economic
benefits of the companies’ sustainability activities. The main reason for this is the fact
that it is difficult to relate specific economic benefits directly to the assessed
sustainability activities. For the cost side, this is generally easier to accomplish since a
particular activity causes a specific cost, but the reasons for an economic benefit that a
company experiences may be manifold. A benefit, such as improved financial
performance or increased operational efficiency, may be the result of a complex mix of
factors, either different CSR or ESG activities, other activities of a company or other
external factors which influence the economic performance of companies. In this regard,
an OECD study states that it is extremely difficult to isolate the effects of one responsible
business conduct measure from another since these tend to create multiple intermediate
effects that play into each other.1175
The literature review will outline the main studies we found regarding the positive
economic impacts of CSR and ESG activities on a company-level. It covers the main
economic benefits that can result for a company from sustainability measures according
to the reviewed surveys and studies. For sector-specific impacts these results can be
used when adapted to the specificities of the studied sector. For example, in some more
sensitive sectors measures regarding sustainability, due diligence or risk management
seem to be of higher importance than in less sensitive sectors for the purposes of
avoiding higher risks.
Different types of benefits
1175 Ibid.
302
Several studies, mainly surveys, have been conducted to assess the main economic
benefits companies expect from sustainability reporting and CSR activities. One main
meta-study reviews academic literature and business reports and conducts an analysis of
empirical data from the Business in the Community Ireland (BITCI) for the years 2003 to
2010. The study identifies more than 60 possible business benefits and indicates the
following seven benefits as the most important benefits (i.e. based on the frequency of
citation) for companies1176:
1) Brand value and reputation
2) Employees and future workforce
3) Operational effectiveness
4) Risk reduction and management
5) Direct financial impact
6) Organisational growth
7) Business opportunity
In addition, a number of consulting reports from large consulting companies have
assessed, mainly based on surveys, the potential benefits that companies expect from
their sustainability activities.
A large report from Ernst & Young and the Boston College Centre for Corporate
Citizenship discusses the different benefits that arise for companies from sustainability
reporting based on a survey conducted among 579 companies on their sustainability
reporting. The survey results indicate that companies consider the following aspects as
the main benefits from sustainability reporting (by order of relevance): improved
reputation (>50% of respondents), increased employee loyalty, reduction of inaccurate
information on the company’s social performance, refinement of corporate vision or
strategy, increased consumer loyalty, waste reduction within company, better
relationship with regulatory bodies, better monitoring and improvement of long-term risk
management, cost savings within company, increased long-term profitability, better
access to capital, and better insurance rates.1177
A large business survey conducted by McKinsey in 2017 among 2,700 companies across
different regions, company sizes and industries on their sustainability programs
addressing environmental, social, and governance issues revealed similar views. The top
eight reasons why companies address sustainability matters were (by order of
relevance): the company’s goals, mission or values; its reputation; consumer
expectations; new growth opportunities; operational efficiency; regulatory requirements;
economic growth; employee satisfaction and attraction.1178
KPMG conducts regular surveys on corporate responsibility reporting. The 2011 report
assesses the reasons for companies to report on their corporate responsibility activities.
It stands out in terms of the number of companies covered as it bases its findings on
3,400 companies from 34 countries, which include the largest 250 global companies. The
results suggest that companies view the following aspects (in order of relevance) as the
1176 Exter, N. and Cunha, S. and Turner, C. (2011) The business case for being a responsible business, Doughty Centre for
Corporate Responsibility at the Cranfield School of Management. Available at https://dspace.lib.cranfield.ac.uk/bitstream/handle/1826/8298/The_business_case.pdf?sequence=1&isAllowed=y 1177 Ernst & Young and the Boston College Centre for Corporate Citizenship (2016). Value of sustainability reporting Value of
sustainability reporting. A study by EY and Boston College Center for Corporate Citizenship. Available at
https://de.scribd.com/document/282949295/EY-Value-of-Sustainability-Reporting 1178 McKinsey (2017) Sustainability’s deepening imprint. Available at: https://www.mckinsey.com/business-
functions/sustainability/our-insights/sustainabilitys-deepening-imprint#
303
eight most important drivers – and thus expected potential benefits – behind their
activities: brand reputation, ethical considerations, employee motivation, innovation and
learning, risk management and risk reduction, access to capital or increased shareholder
value, economic considerations, better supplier relationships.1179
Another report from Ernst & Young summarises key messages from supply chain,
procurement and sustainability executives from 70 companies in order to discuss the
drivers, approaches and challenges companies face in the ongoing journey to building a
responsible and resilient supply chain. As the main benefits for companies from
improving environmental, social and governance (ESG) performance in their supply
chains, the study names improved processes, reduced costs, increased productivity,
innovation, and improvement of societal outcomes.1180
Finally, other EU impact assessments on similar legislative initiatives have assessed
possible economic benefits from the proposed regulations. The impact assessment for
the EU Non-financial Reporting Directive reports that surveyed companies listed as most
important benefits: improvements related to credibility, overall transparency, risk
management and the internal culture. It concludes that the regulation is expected to
provide benefits for companies at the internal (i.e. better employee relations, improved
management systems and internal processes, etc.) as well as external level (i.e.
enhanced reputation, better perception by and dialogue with stakeholders, easier access
to capital). The impact assessment also stipulates expected overall economic benefits
from better management of risks and allocation of capital, enhanced trust in business
and better resources management. The EU impact assessment on the Conflict Minerals
Regulation indicates that the main benefits for companies are expected from
“unquantifiable externalities which can be used for marketing purposes such as public
image, Corporate Social Responsibility (CSR) and consumer satisfaction”.
For the EU Timber Regulation1181 (EUTR) the official Impact Assessment and the related
background analysis as well as the latest biennial implementation report (2015-2017)1182
and its related background analysis1183 were reviewed.
According to the background report of the Impact Assessment1184, the reduction of
imports of illegal timber is expected to lead to a moderate increase in the price and
production of timber and wood products in the EU. Especially forest owners would benefit
as the value added in forestry is projected to increase 5-8 percent. On average and for
all options (except option 2) the value added in the EU forest sector is expected to
1179 KPMG (2011) KPMG International Survey of Corporate responsibility Reporting 2011. Available at:
https://assets.kpmg/content/dam/kpmg/pdf/2012/02/Corporate-responsiblity-reporting-2012-eng.pdf 1180 Ernst & Young (2016). The state of sustainable supply chains - Building responsible and resilient supply chains. Available at
https://www.ey.com/Publication/vwLUAssets/EY-building-responsible-and-resilient-supply-chains/$FILE/EY-building-
responsible-and-resilient-supply-chains.pdf 1181 See: https://ec.europa.eu/environment/forests/eutr_report.htm 1182 European Commission (2018). Evaluation of Regulation (EU) No 995/2010 of the European Parliament and of the Council of
20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber
Regulation). Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538746572677&uri=COM:2018:668:FIN. 1183 European Commission (2018). Background analysis of the 2015-2017 national biennial reports on the implementation of
the European Union’s Timber Regulation (Regulation EU No 995/2010). Retrieved from:
https://ec.europa.eu/environment/forests/pdf/WCMC%20EUTR%20analysis%202017.pdf. Note: The biennial implementation
report basically summarises the findings from the background analysis. There are also "national reports" available on the
website, but these contain only the reporting forms for each MS which they had to fill out. All results from these reporting sheets are provided also in overview tables in the background analysis report and in a shortened form in the implementation
report. 1184 Indufor (2008). Assessment of the impact of potential further measures to prevent the importation or placing on the
market of illegally harvested timber or products derived from such timber. Final Report. [online] Helsinki, Finland: Indufor in
association with European Forest Institute (EFI). Available at: https://ec.europa.eu/environment/forests/pdf/ia_report.pdf
[Accessed 10 Sep. 2019].
304
increase slightly more than 1 percent. The biennial implementation report discusses the
implementation of the Regulation by Member States and does not discuss economic
benefits.
The EU Impact Assessment on a proposed EU Regulation on Sustainable Investment
(2018)1185 describes two main regulatory options: Option 2 provides for a clarification of
existing EU rules on duties towards investors/beneficiaries (non-legislative approach).
Option 3 requires the integration of ESG factors in the investment process and the
advisors' recommendation process as part of duties towards investors/beneficiaries (light
regulatory approach).
The Impact Assessment focuses on general economic impacts rather than firm-specific
impacts and describes the following expected overall economic impacts (pp. 105):
By increasing the overall transparency, the different initiatives will reduce the
asymmetry of information between end-investors, financial intermediaries and
index provider.
This enhanced transparency from the whole investment value chain will increase
the reliability and attractiveness of ESG financial products and foster innovation in
investment strategies and the design of these financial products.
The proposed initiatives would also reduce the current market fragmentation in
terms of methodologies for identifying environmentally sustainable
activities/investments and developing low carbon benchmarks
By fostering the development of more ESG products, the initiative would increase
competition between financial intermediaries and therefore reinforce the
efficiency of the market of ESG products.
It would incentivise financial entities to be more innovative and to adopt higher
ESG standards. This would ultimately increase the competitiveness of the
European sustainable finance market.
In addition, the Impact Assessment foresees for both options (2 and 3) reputational
benefits from increased disclosure on ESG integration and the higher comparability of
disclosed ESG information, which could possibly attract new investors.
The EU Directive on the protection of the environment through criminal law, called
Environmental Crime Directive (ECD) (Directive 2008/99/EC), lays down a list of
environmental offences that must be considered criminal offences by all Member States.
The Impact Assessment1186 for this Directive describes possible impacts of Policy Option
3 on business relatively generally as follows:
It cites an OECD report which argues that companies which improved their
environmental performance experienced a greater net probability of earning
positive profits between 3-34%.
1185 European Commission (2018). COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT. Accompanying the
document Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to
facilitate sustainable investment and Proposal for a Regulation of the European Parliament and of the Council on disclosures
relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 and Proposal for a
Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks. Available at: https://eur-lex.europa.eu/legal-
content/EN/ALL/?uri=CELEX:52018SC0265 1186 European Commission (2007). COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of the environment through criminal law
IMPACT ASSESSMENT. Retrieved from: https://ec.europa.eu/smart-
regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf.
305
Eliminating the illegal options on the market will encourage more investments in
legal businesses.
It will balance the competition between companies because businesses that
respect often have already made significant investments to be able to comply
with the strict existing rules are protected by tougher sanctions for their
competitors who gain an unfair advantage by not complying.
It will also improve the confidence of third countries businesses in the quality of
products from the EU.
A review was carried out by EFFACE (European Union Action to Fight Environmental
Crime), a 40-month EU funded research project. The objective was to assess the impacts
of environmental crime as well as effective and feasible policy options for combating it
from an interdisciplinary perspective, with a focus on the EU. The project ended in March
2016.The final synthesis1187 report concluded that one of the main challenges was data
and information management in the area of environmental crime. It does not assess
economic impacts or benefits for firms.
No official impact assessment was found online on the EU Environmental Liability
Directive (ELD, Directive 2004/35/EC), only a report on the implementation of the ELD,
but economic benefits to firms are not discussed.1188 The REFIT Evaluation only states
that “it is difficult to quantify the benefits gained through prevention, in particular due to
the lack of complete information on the total of preventive actions and other
precautionary measures taken under the ELD”.
The Seveso III Directive (2012/18/EU)1189 aims at the prevention of major accidents
involving dangerous substances as well as at limiting the consequences of such accidents
for human health and the environment. The Directive requires operators to fulfil several
obligations, including, for example, producing external emergency plans for high-risk
establishments, and deploying land-use planning for the siting of establishments, making
relevant information publicly available.
The Impact Assessment1190 of the Seveso III Directive discusses mainly costs for
operators, but also considers some benefits. As expected benefits the Impact
Assessment describes the following:
Improved emergency preparedness will mitigate the effects of major accidents
and the costs of major accidents are avoided (as an example, it has been
estimated that the Buncefield accident in England, in 2005, cost in the region of
£1bn14).
1187 European Union Action to Fight Environmental Crime (2016). ENVIRONMENTAL CRIME AND THE EU - Synthesis of the
Research Project “European Union Action to Fight Environmental Crime” (EFFACE). Retrieved from: https://efface.eu/final-efface-report-environmental-crime-and-eu 1188 Brussels, 14.4.2016 COM(2016) 204 final REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN
PARLIAMENT Report from the Commission to the Council and the European Parliament under Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. Retrieved from:
https://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-204-EN-F1-1.PDF. And COMMISSION STAFF WORKING
DOCUMENT REFIT Evaluation of the Environmental Liability Directive Accompanying the document Report from the Commission
to the European Parliament and to the Council pursuant to Article 18(2) of Directive 2004/35/EC on environmental liability with
regard to the prevention and remedying of environmental damage. SWD/2016/0121 final. Retrieved from: https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2016:121:FIN 1189 For more information, please see: European Commission (2019). Major accident hazards. Available at:
https://ec.europa.eu/environment/seveso/legislation.htm. 1190 See European Commission (2010). COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT Accompanying document
to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the control of major-accident
hazards involving dangerous substances. Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52010SC1590.
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Improved business performance and competitiveness are expected as a result of
better safety management systems which will increase efficiency and processes.
The benefits described for the different policy options are very specific to each option,
e.g. they refer to reduced costs for operators which will not have to manage the
provision of information to the general public (Option 5).
The latest Commission report available on the website, i.e. the Report on the Application
in the Member States of Directive 96/82/EC on the control of major-accident hazards
involving dangerous substances for the period 2009-2011, does not provide any
information on the economic benefits for companies.
Based on the findings of these studies as well as the categorization of benefits in a
recent study by the OECD (2016) on the costs, risks and benefits of due diligence for
responsible business conducts, the main reports found in this literature review are
grouped into the following categories of economic company-level benefits:
a) Financial and stock performance
b) Cost of capital
c) Brand image and reputation
d) Human resources
e) Risk management
f) Operational efficiency and innovation
It has to be kept in mind, however, that not all studies clearly distinguish between these
categories as these are to some extent interrelated. For example, a good image and
reputation, good risk management or operational efficiency, which are seen as results of
sustainability and CSR measures, can be reflected in better financial performance
measures in terms of stock market prices or accounting-based measurements like return
on assets (ROA). As a result, the existing literature is discussed in these categories as
far as possible, although it does not always fall exclusively into one category.
Financial and Stock Performance
Extensive research has been carried out on the impact of sustainability measures
conducted by companies on their financial or stock performance. Companies’ activities
related to sustainability and CSR can improve their financial and stock performance in
different ways, many of which are discussed in more detail in other parts of this
literature review. For example, on the income side, sustainability measures can increase
a company’s competitiveness or reputation and as a result promote its sales, leading to
higher revenues, or improve its stock market performance. On the cost side,
sustainability activities can help to save costs by increasing operational efficiency and
cutting down resource costs or lead to lower capital cost due to reduced business risks.
Financial performance has different dimensions and can thus be measured in different
ways. Two main approaches to measuring financial performance are accounting
indicators like ROA and stock performance as an indicator of the expected future
performance of a company.
There has been an extensive realm of research over the past three decades on the
relationship between the corporate social responsibility activities of companies and their
financial performance. These include many academic works as well as industry studies
and consulting reports. Most studies refer to ESG activities as sustainability indicators
307
and find a slightly positive relationship between companies’ activities and their financial
performance, although findings are mixed.
One of the main meta-analyses (Margolis et al., 2009) assesses about 250 empirical
studies from a period of about 35 years. The authors come to the conclusion that
corporate social performance has an overall positive effect on corporate financial
performance, but the effect is rather small. In addition, it suggests that revealed
misbehaviour has a more pronounced effect on the financial performance of a company
than doing well. Similarly, Fatemi et al. find that strong environmental, social, and
governance performance increases a company’s value and that weaknesses decrease
it.1191
Another recent meta-analysis by Bassen et al. about the financial effects of
environmental, social, and governance (ESG) criteria assesses about 2200 individual
studies. The authors argue that the results of their meta-analysis show that the business
case for ESG investing is empirically very well founded. Accordingly, the large majority of
studies finds a positive relationship between environmental, social, and governance
criteria and corporate financial performance, and this positive impact appears stable over
time. In addition, almost all (90%) studies find a nonnegative relationship between ESG
criteria and financial performance.1192
Eccles et al. based on statistical data of 180 companies suggest that companies which
have been employing environmental and social policies in the past perform significantly
better than a comparator group regarding stock market and accounting performance.
The study also concludes that the effect is stronger in sectors where companies deal with
consumers (B2C) not companies (B2B), where companies compete based on brands and
reputations and where products depend on large amounts of natural resources.1193
Ameer et al. assess whether the top 100 sustainable global companies from the
developed countries and emerging markets show a higher financial performance than a
comparator group in 2008. The study concludes that in some sectors these companies
indeed show higher (mean) sales growth, return on assets, profit, and cash flows from
operations.1194
There are also some studies concluding that empirically no direct impact can be
measured due to the broad scope and comprehensiveness of the used concepts or that
the relationship between sustainability activities and financial performance may be bi-
directional, i.e. it is not clear if good financial performance drives sustainability
engagement or vice versa.
A second set of studies assesses the relationship between companies’ sustainability
activities and their stock market price performance. The reviewed studies are mainly of
academic nature.
1191 Fatemi, A. and Glaum, M. and Kaiser, S. (2017). ESG performance and firm value: The moderating role of disclosure.
Global Finance Journal, Volume 38, 2018, Pages 45-64. Available at
https://www.sciencedirect.com/science/article/pii/S1044028316300680 1192 Bassen, A. and Busch, T. and Friede, G. (2015). ESG and financial performance: aggregated evidence from more than
2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917 1193 Eccles, R. G., and Ioannou, I. and Serafeim, G. (2014). "The Impact of Corporate Sustainability on Organizational
Processes and Performance," Management Science, vol 60(11), pages 2835-2857. Retreived from:
www.nber.org/papers/w17950 1194 Ameer, R. and Othman, R. (2012). Sustainability Practices and Corporate Financial Performance: A Study Based on the Top
Global Corporations. Journal of Business Ethics, June 2012, Volume 108, Issue 1, pp 61–79. Available at
https://link.springer.com/article/10.1007/s10551-011-1063-y
308
A large meta-analysis by Clark et al. assesses the relationship between sustainable
management in terms of environmental, social, and governance (ESG) issues and a
company’s economic performance. The meta-study is based on more than 200 different
sources (academic articles, industry reports, news articles, books), covering 11 years
from 2005 to 2015. The study finds a positive correlation between the sustainability
business practices and the economic performance of companies. Based on 41 studies on
the relationship between sustainability measures and financial market performance, the
study finds that 80% of the assessed studies conclude that a company’s stock price
performance is positively influenced by its good sustainability practices.1195
The study by Eccles et al. tracks the stock market performance of the assessed 180
companies for two groups, the high- and low-sustainability companies, from 1993 to
2010. The results show that high-sustainability companies clearly outperform low-
sustainability companies on the stock market1196: Investing 1 USD in assets in a value-
weighted portfolio in the beginning of 1993, the investment would have grown by the
end of 2010 to 22.6 USD for high-sustainability companies and only to 15.4 USD for the
control companies (p. 20). Overall, stocks of high-sustainability companies outperform
low-sustainability companies annually by 4.8%.1197
A study from 2018 revises 55 studies for the years 2010 to 2018. It finds that those
studies that are linking CSR activities to company value indicate that higher CSR
activities can lead to higher corporate value, higher equity returns and lower risk,
enhancing the general collateral value of the company.1198
A major challenge is to find reports which do not merely assess whether a positive
relationship exists, but a study which provides estimates about potential magnitudes.
The only study which provides some numerical estimates in this regard is a project
report by Bliss et al. (2015) which assesses the relationship between the corporate
environmental, social, and governance practices and companies’ financial, competitive,
and wider business performance. The report, for that purpose, analyses over 300
existing studies (academic articles and other studies) complemented by interviews of
executives and CR practitioners. It finds that corporate responsibility practices can
increase the financial returns on investment as well as trigger related business and
competitive benefits. It found that the potential impacts of corporate responsibility
activities for different aspects of financial and stock performances are (p. 3):
Over a 15-year period, increase shareholder value by (measure stated in the
study: 1.28 billion USD)
Increased valuation for companies with strong stakeholder relationships: 40-80%
Reduced share price volatility: 2-10%
Avoid market losses from crises: 378 million USD
For a detailed list of the assessed studies, please see Annexure D, Table 1.
1195 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281 1196 The authors argue that due to the fact that companies are identified based on policy adoption decisions which were taken a
sufficiently long time ago (which leads to a long time-lag between the independent and dependent variables), the likelihood of biases from reverse causality is mitigated. 1197 Eccles, R. G., and Ioannou, I. and Serafeim, G. (2014). "The Impact of Corporate Sustainability on Organizational
Processes and Performance," Management Science, vol 60(11), pages 2835-2857. Retreived from:
www.nber.org/papers/w17950 1198 Gerard, B. (2018). ESG and Socially Responsible Investment: A Critical Review. 2018. Social Science Research Network.
Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3309650
309
Cost of Capital
The literature also suggests that sustainability activities of companies can have a
positive impact on companies’ economic and financial performance in regard to the cost
of capital. Companies with good sustainability records may be more likely to attract
investors (debt, equity, hybrid instruments) than other companies due to the
expectation of reduced risks as discussed below. In addition, it is often argued that
sustainability measures and related disclosure standards reduce information
asymmetries between companies and investors. As a result, the cost of capital for such
companies can be lower and access to capital can be eased.
A large amount of research, empirical assessments as well as literature reviews, has
been conducted to assess the relationship between sustainability measures of companies
and the cost of capital. These include general studies as well as country specific analyses
and some studies focus on particular aspects such as environmental performance. The
large majority finds that increase sustainability performance of companies is positively
related to the cost of capital, i.e. increased sustainability performance causes lower costs
of capital.
One of the major meta-analyses found is the study conducted by Clark et al., which
assesses the relationship between sustainable management (environmental, social, and
governance issues) and a company’s economic performance. The study looked at
different aspects of economic performance, one being the cost of capital. In this regard,
it finds that 90% of the studies on the cost of capital indicate that good ESG standards
lower the cost of capital for companies.1199
Another large meta-analysis based on 58 articles on the relationship between
sustainability performance and/or sustainability disclosure and the cost of capital
published between 2008 and 2018, comes to a similar conclusion. Despite some variance
in the empirical results, it finds that most of the assessed studies find a statistically
significant negative (in terms of correlation between the time series) relationship
between the two variables. The authors conclude that these results suggest that the
sustainability performance of a company is relevant for its value and that the valuation
effect is also seen in the lower cost of capital for these companies.1200
As outlined above, Bliss et al. provide a literature review on the relationship between
corporate environmental, social, and governance practices and financial performance.
Based on their evaluations, they stipulate (as the only study) a quantitative estimate for
cost reduction for equity of 1%.1201
Kölbel and Busch review various studies to assess the differences in results of two
different types of studies, i.e. the analyses that are assessing the impact of sustainability
measures on financial performance and the studies assessing the link of such measures
1199 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281 NOTE 40 1200 Gianfrate, G. and Schoenmaker, D. and Wasama, S. (2018). Cost of capital and sustainability: a literature review. Working
paper series 03, Erasmus Platform for Sustainable Value Creation, Rotterdam School of Management. Available at
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=2ahUKEwjdhZSr3vjhAhVEIVAKHTj8AiwQFjAEegQIBBAC&url=https%3A%2F%2Fwww.rsm.nl%2Ffileadmin%2FImages_NEW%2FErasmus_Platform_for_Susta
inable_Value_Creation%2F11_04_Cost_of_Capital.pdf&usg=AOvVaw1Csckr51QrS7OOrmnzFYrH. 1201 Bliss, R. and Jordan, S. and Rochlin, S. and Yaffe Kiser, C. (2015). Project ROI Report: Defining the Competitive and
Financial Advantages of Corporate Responsibility and Sustainability. IO Sustainability, Lewis Institute for Social Innovation at
Babson College. Available at https://www.issuelab.org/resource/project-roi-report-defining-the-competitive-and-financial-
advantages-of-corporate-responsibility-and-sustainability.html
310
with the cost of capital. They conclude that these different types of studies use different
approaches with different inherent assumptions.1202 This leads, on the one hand, to
mixed results on the relationship between ESG criteria and financial performance, while,
on the other hand, the link between ESG performance and the cost of capital is well
established. They conclude that these results are due to a common explanation, i.e. that
ESG performance is priced efficiently in financial markets. According to the authors, this
explains why the high ESG performance has a neutral effect on investment performance,
while it leads to lower capital costs.
Based on empirical data for US companies for the years 1992 to 2007, El Ghoul et al.
assess how companies’ CSR scores affect their cost of capital. The authors find that
companies with socially responsible practices have significantly lower cost of equity
capital. They also assess which CSR activities contribute particularly to reducing
companies' cost of equity and find that investment in improving responsible employee
relations, environmental policies, and product strategies are substantial contributors,
while CSR activities related to community relations, diversity, and human rights are
not.1203
Based on a sample of 3,000 companies over 23 years (1990-2013), Ng and Rezaee
assess empirically the question whether and how different environmental, social, and
governance dimensions as well as components of economic sustainability disclosure
affect the cost of equity for companies. They find a negative relationship between
corporate sustainability performance and the cost of equity capital, i.e. if sustainability
performance increases, the cost of capital decreases.1204 In addition, their findings
suggest that only the environmental and governance sustainability performance
dimensions contribute to this relationship.
La Rosa et al. assess the impact of corporate social performance on the cost of capital
and access to it and find that if corporate social performance increases, the interest rate,
i.e. the cost, for debt capital goes down. The assessment is based on a sample of listed
non-financial European companies for the years 2005 to 2012.1205
Similarly, Cooper and Uzun assess, based on a large sample of U.S. firms across all
industries from 2006 to 2013, the relationship between corporate social responsibility
(ESG performance9 and the cost of debt financing. The authors find that companies with
strong CSR have a lower cost of debt, especially companies in the manufacturing and
financial industries. For their assessment they use four broad measures of CSR
performance and two measures of the cost of debt. 1206
For a detailed list of the assessed studies, please see Annexure D, Table 2.
1202 Kölbel, J. and Busch, T. (2017). The link between ESG, alpha, and the cost of capital: Implications for investors and CFOs.
corporate finance biz. 3/4. 82 - 85. Available at https://www.researchgate.net/publication/315815434_The_link_between_ESG_alpha_and_the_cost_of_capital_Implications_f
or_investors_and_CFOs 1203 El Ghoul, S. and Guedhami, O. and Kwok, C. and Mishra, D. (2011). Does corporate social responsibility affect the cost of
capital? Journal of Banking & Finance, 35, issue 9, p. 2388-2406. Available at
https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:9:p:2388-2406 1204 Ng, A. C. and Rezaee, Z. (2015). Business Sustainability Performance and Cost of Equity Capital. Available at:
http://dx.doi.org/10.2139/ssrn.3148611 1205 La Rosa, F., Liberatore, G., Mazzi, F. and Terzani, S. (2017). The impact of corporate social performance on the cost of
debt and access to debt financing for listed European non-financial firms. European Management Journal, Volume 36, Issue 4, August 2018, Pages 519-529. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0263237317301317 1206 Cooper, E. and Uzun, H. (2015). Corporate Social Responsibility and the Cost of Debt. Journal of Accounting and Finance
Vol. 15(8) 2015. Available at:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwj5zu6lq-
fkAhVC16QKHY6nC6gQFjAAegQIARAC&url=http%3A%2F%2Ft.www.na-
businesspress.com%2FJAF%2FCooperEW_Web15_8_.pdf&usg=AOvVaw3XNr_z_aphBEidxEXc0bUR
311
Brand Image and Reputation
Central perceived benefits of CSR and sustainability activities for a company are
improved reputation and brand image. It is argued that CSR and sustainability activities
not only lead to higher sales, but also enable a company to attract employees (discussed
below in section D). Several studies have assessed the relationship between CSR
activities and a company’s reputation and tried to analyse whether these have brought
any economic benefits to companies in the form of increased sales or better prices.
The studies usually assess different aspects of sustainability and most are based on
surveys or experimental studies. The studies seem to find a positive impact, but it has to
be kept in mind that many studies are survey-based, i.e. their results reflect consumer
intentions rather than concrete purchase decisions.
An online survey conducted regularly by Nielsen among 30,000 consumers, shows that
most consumers (55%) say they are willing to pay extra for products and services from
companies that are committed to positive social and environmental impact. An additional
assessment of sales data show that after one year the sales of products with
sustainability claims on the packaging rose on average by 2% and the sales of products
which promoted sustainability actions through marketing programs rose by 5%. The
sales of products without sustainability claims or marketing shows a sales rise of only
1%.1207
Hainmueller and Hiscox carried out two large-scale experiments in 419 retail stores and
155 outlet stores in the United States to assess the impact of environmental
certifications and product labelling on purchasing decisions. They find that the assessed
environmental label had a substantial positive effect on sales among female customers,
increasing sales by 8%. In contrast, there was no positive effect found for male
customers.1208
Ferreira et al. assess if corporate social responsibility activities would positively influence
consumer perception about the benefit and the value of the product, the judgment of
fairness in the price differential charged for it, and the consumer’s buying intention. The
findings indicated that consumers perceived greater benefit and value in the product of
the socially responsible company. As a result, consumers showed to be willing to pay
10% more for such products and perceived this price differential as being fair.1209
Choi and Ng use experimental methods to assess whether environmental and economic
dimensions of sustainability have an effect on consumer responses. The authors find that
economic and environmental sustainability information has a positive impact on the
evaluation of a company and consumers’ purchase intent.1210 Similarly, Boccia et al. find,
based on a choice experiment, a positive relationship between socially responsible
initiatives of companies and attitudes of consumers towards them and their products.
However, they also point out that corporate social responsibility is for most people not
1207 Nielsen (2014). Doing Well By Doing Good. Available at https://www.nielsen.com/us/en/insights/reports/2014/doing-well-
by-doing-good.html 1208 Hainmueller, J. and Hiscox, M. (2015). Buying Green? Field Experimental Tests of Consumer Support for Environmentalism.
Working Paper. Available at https://scholar.harvard.edu/hiscox/publications/buying-green-field-experimental-tests-consumer-support-environmentalism 1209 Ferreira, D. A. and Avila,M.G. and Dias de Faria, M. (2010). Corporate social responsibility and consumers' perception of
price. Social Responsibility Journal, Vol. 6 Issue: 2, pp.208-221. Available at https://doi.org/10.1108/17471111011051720 1210 Choi, S. and Ng, A. (2011). Environmental and Economic Dimensions of Sustainability and Price Effects on Consumer
Responses. Journal of Business Ethics, Volume 104, Issue 2, pp 269–282. Available at https://doi.org/10.1007/s10551-011-
0908-8
312
the choice criterion for purpose, because traditional purchasing criteria, like the price,
are more important.1211
Kimeldorf et al. highlight that in polls people often indicate that they would pay more for
products which are manufactured responsibly by taking into account workers and
environmental rights. However, the authors also point out that when consumers go
shopping, they either forget these opinions or choose not to act on them. Nevertheless,
the results of an experiment on the purchase of socks produced under good working
conditions, which were labelled accordingly, indicate that even people with “modest
means and education” choose for “conscious consumption”.1212
Another recent study by Juergens and Erdmann (2019)1213 aims to provide (based on a
literature review, survey and interviews) qualitative background information on the role,
importance and use of non-financial reporting (and its regulation) and ESG and carbon
and climate data. The study concludes that “Reputational risk is seen as number one
driver (73%) of the demand for ESG information”. The authors also describe as other
drivers for the provision of ESG information – i.e. also the expected advantages or
benefits from the reporting of ESG information – demand by institutional and private
clients (investors), a broader societal trend towards environmental awareness.
For a detailed list of the assessed studies, please see Annexure D, Table 3.
Human Resources
Another potential benefit that can result for companies from their sustainability
measures and CSR activities is a positive impact on their human resources as such
measures can increase the loyalty and motivation of employees, leading to higher
efficiency and productivity as well as better recruitment perspectives and lower staff
turnover.
An online survey conducted regularly by Nielsen among 30,000 consumers in 60
countries found that 67% of respondents prefer to work for socially responsible
companies.1214
Similarly, an often-quoted experimental study by Greening and Turban1215 finds that
prospective job applicants are more likely to pursue jobs from socially responsible
companies than from companies with poor social performance reputations. The authors
conclude that a company’s corporate social performance may influence especially high-
quality candidates to choose one company over another and therefore lead to a
competitive advantage by attracting and retaining high-quality candidates.
A large survey among 1,726 university students on their goals, job criteria and job
satisfaction found that more than a third of the future employees would take a 15% pay
1211 Boccia, F, Malgeri Manzo, R, Covino, D. (2019). Consumer behavior and corporate social responsibility: An evaluation by a
choice experiment. Corp Soc Resp Env Ma. 2019; 26: 97– 105. Available at https://doi.org/10.1002/csr.1661 1212 Kimeldorf, Howard, Rachel Meyer, Monica Prasad, and Ian Robinson. "consumers with a conscience: will they pay more?."
contexts 5, no. 1 (2006): 24-29. Available at: https://journals.sagepub.com/doi/pdf/10.1525/ctx.2006.5.1.24 1213 DIW, Berlin. Juergens, I. and Erdmann, K. (2019). A short qualitative exploration of the reporting and use of non-financial data in the context of the fitness check of the EU framework for public reporting by companies. DIW Berlin. 1214 Nielsen (2014). Doing Well By Doing Good. Available at https://www.nielsen.com/us/en/insights/reports/2014/doing-well-
by-doing-good.html 1215 Greening, D. W., and Turban, D. B. (2000). Corporate Social Performance as a Competitive Advantage in Attracting a
Quality Workforce. Business & Society, 39(3), 254–280. https://doi.org/10.1177/000765030003900302.
313
cut to work for a company committed to social responsibility and nearly one-half (45%)
would do so for a job that makes a social or environmental impact.1216
Similarly, the meta-analysis by Clark et al. assesses the relationship between sustainable
management and a company’s economic performance.1217 In this context the study
argues, based on findings by Edmans that good reputation regarding the working
conditions can increase the company’s attractiveness for employers and can help to
retain workers.1218
Vitaliano assesses company’s voluntary turnover (quit) rates. This study finds that
measures leading to a rating as a socially responsible company correlate with a reduction
of the annual quit rate by 3-3.5%, which amounts to a 25‐30% reduction compared to
companies which are not ranked as socially responsible.1219
The same study by Juergens and Erdmann1220 mentioned above concludes that, apart
from the main driver of the demand for ESG information being reputational risk, this
demand for information on such sustainability information is also driven by the
competition for talent.
For a detailed list of the assessed studies, please see Annexure D, Table 4.
Risk Management
Most supply chains today are international and include many different suppliers and
stakeholders in different regions. Due diligence is understood as a comprehensive risk
management process to identify, assess, prevent and mitigate the risks within these
complex supply chains. Research indicates, on the one hand, that sustainability
measures can reduce business risks, and, on the other hand, this reduced risk can result
in a concrete economic impact for companies.
Sassen et al. assess the impact of corporate social performance (operationalised by
environmental, social, and governance factors) on market-based company risk in
Europe. The authors find that better corporate social performance - especially in the
social dimension - can increase company value through lower company risk.1221
Kumar et al. study the link between ESG and risk to assess if stock prices of ESG
positive companies perform better than stocks from non-ESG companies. The study finds
that companies, which incorporate ESG factors show lower volatility in their stock
performances than the comparator group in the same industry. They also find that each
1216 Szeltner, M. and Zukin, C. (2012). Talent Report: What Workers Want in 2012. Study by Net Impact and Rutgers
University. Available at https://www.netimpact.org/research-and-publications/talent-report-what-workers-want-in-2012 1217 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281 NOTE 40 1218 Edmans, A. (2012). The Link Between Job Satisfaction and Firm Value, with Implications for Corporate Social
Responsibility. Academy of Management Perspectives 26(4), 1-19, November 2012. Available at SSRN:
https://ssrn.com/abstract=2054066 or http://dx.doi.org/10.2139/ssrn.2054066 1219 Vitaliano, D. F. (2010). Corporate social responsibility and labour turnover. Corporate Governance: The international
journal of business in society, Vol. 10 Issue: 5, pp.563-573. Available at https://doi.org/10.1108/14720701011085544 1220 DIW, Berlin. Juergens, I. and Erdmann, K. (2019). A short qualitative exploration of the reporting and use of non-financial
data in the context of the fitness check of the EU framework for public reporting by companies. DIW Berlin. 1221 Sassen, R.; Hinze, A.K.; Hardeck, I. (2016). Impact of ESG factors on firm risk in Europe. Journal of Business Economics,
Volume 86, Issue 8, pp 867–904. Available at https://link.springer.com/article/10.1007%2Fs11573-016-0819-3
314
industry is affected differently by ESG factors, and that ESG companies generate higher
returns.1222
Eccles et al. also find that the portfolio of high sustainability companies experiences
lower volatility (1.43% and 1.72% on a value-weighted and equal-weighted base) than
the portfolio of low sustainability companies (1.72% and 1.79%, respectively).1223
McKinsey interviewed leaders from sustainable companies in 2014. The interviews
suggest that the economic value that can be at stake from sustainability issues can
reach up to 70% of a company’s earnings (before interest, taxes, depreciation, and
amortisation). It shows that effective risk management can have a substantial economic
impact for a company. The study reports that business leaders pursue sustainability
matters because they believe it has a material financial impact. The economic value
considered to be at stake from risks related to reputation (e.g. reputational damage
based on perceived misuse of resources) is estimated at 70% of a company’s earnings,
while the value at stake from risks related to rising operation costs (e.g. increasing raw-
material costs due to increased demand/lower supply) is estimated at 60% and the
value at stake from risks related to possible supply chain disruptions is 25% (e.g.
production delay or cancellation due to lack of access).1224
For a detailed list of the assessed studies, please see Annexure D, Table 5.
Operational Efficiency and Innovation
Some authors argue that sustainability measures can have an impact on a company’s
operational efficiency and innovation. Accordingly, sustainability measures can lead to a
more efficient use of resources and therefore result in cost-savings for a company.
Similarly, it is suggested that a focus on sustainability and resource efficiency can
provide opportunities for innovations in the form of new products (e.g. green products)
or new process and logistics solutions. However, these relationships are mainly discussed
in relation to case studies of selected companies.
According to the meta-analysis conducted by Clark et al., most studies show a positive
relationship between sustainability and operational performance. In fact, 88% of the
studies show that solid ESG practices result in better operational performance. This is
particularly the case for environmental measures (e.g. corporate environmental
practices, pollution abatement, and resource efficiency). The authors argue that
empirical research clearly indicates that good corporate environmental practices
positively influence the competitiveness of companies and therefore lead to better
corporate performance. Regarding social factors, employee relationship and good
workforce practices are found to have a large impact on operational performance.
However, the authors also point out that there is a lack of research on the direct link
1222 Kumar, N.C.A. and Smith, C. and Badis, L. and Wang,N. and Ambrosy, P. and Tavares, R. (2016). ESG factors and risk-
adjusted performance: a new quantitative model. Journal of Sustainable Finance & Investment. Available at http://dx.doi.org/10.1080/20430795.2016.1234909 1223 Eccles, R. G., and Ioannou, I. and Serafeim, G. (2014). "The Impact of Corporate Sustainability on Organizational
Processes and Performance," Management Science, vol 60(11), pages 2835-2857. Retreived from:
www.nber.org/papers/w17950 1224 McKinsey (2017) Sustainability’s deepening imprint. Available at: https://www.mckinsey.com/business-
functions/sustainability/our-insights/sustainabilitys-deepening-imprint#
315
between other types of corporate social measures such as worker-safety standards in
emerging markets and respect for human rights.1225
Eccles and Serafeim also argue that including ESG issues in their sustainability
framework leads to cost savings for companies through innovation, resource efficiency,
and revenue enhancements due to sustainable products.1226
McKinsey found evidence that increased efficiency in the use of resources is an indicator
of better financial performance. They found a significant correlation between resource
efficiency of companies within a sector and their financial performance. Those companies
that performed best in each sector were also those which had the most ambitious
sustainability strategies.1227
Whelan and Fink provide several examples of companies which have benefitted
economically from resource and process efficiencies due to their sustainability programs.
For example, they cite the company Dow which has invested 2 billion USD since 1994 in
improving resource efficiency but in return has saved 9.8 billion USD from reduced
energy, waste and water consumption. Another example is Wal-Mart, which increased its
fleet efficiency and saved almost 11 million USD due to improved fuel efficiency.1228
In a 2012 report on sustainability for consumer business companies Deloitte concludes
that sustainability is recognised increasingly as a primary driver for strategic product and
business model innovation. The report argues that truly innovative companies have put
sustainability at the heart of their business examining strategic decisions based on the
criterion of sustainability.1229
For a detailed list of the assessed studies, please see Annexure D, Table 6.
1.1.3 Impact on Company-Level Competitiveness
According the European Commission’s Better Regulation Policy,1230 the EU is determined
‘to ensure that its proposals meet policy goals at minimum cost and deliver maximum
benefits to citizens, businesses and workers while avoiding all unnecessary regulatory
burdens. This is key to support growth and job creation – allowing the EU to ensure its
competitiveness in the global economy - while maintaining social and environmental
sustainability.’ These objectives need to be taken into consideration for the assessment
of the potential impact of due diligence policies on company-level competitiveness.
The literature on the impact of due diligence regulations on company-level
competitiveness points to two broader types of implications: the impact on cost
competitiveness and the impact on other factors that may impact on a company’s overall
competitiveness in its respective markets, including its sourcing markets. The cost
1225 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281 NOTE 40 1226 Eccles, R. G., and Serafeim, G. (2013). The performance frontier: Innovating for a sustainable strategy. Harvard Business
Review, May 2013, 50-60. Available at https://hbr.org/2013/05/the-performance-frontier-innovating-for-a-sustainable-
strategy 1227 McKinsey (2017) Sustainability’s deepening imprint. Available at: https://www.mckinsey.com/business-
functions/sustainability/our-insights/sustainabilitys-deepening-imprint# 1228 Whelan, T. and Fink, C. (2016). The Comprehensive Business Case for Sustainability. Harvard Business Review. Available
at https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability. 1229 Deloitte (2012). Sustainability for consumer business companies. A story of growth. Available at
https://www2.deloitte.com/hr/en/pages/consumer-business/articles/sustainability-for-consumer-business-companies.html 1230 European Commission (2019). Better regulation in the European Commission. Available at
https://ec.europa.eu/info/sites/info/files/better-regulation-guidelines-better-regulation-commission.pdf
316
competitiveness impact is mainly a function of the 1) administrative burden and 2)
transparency-induced decreases on companies’ refinancing costs (see also Cost of
Capital). The second group of factors comprises competitive advantages, e.g.
advantages in attracting and retaining employees, greater consumer loyalty, less
operational delays, less problematic relations with governments and local communities,
and less reputational risks and damages.
It is generally difficult to quantify changes in companies’ relative competitiveness. While
a quantification of the cost impact is generally feasible on the basis of industry data and
survey results, the impact of other factors on changes in the competitive position of a
company is difficult to quantify without having access to detailed company-level data
(corporate due diligence). As a result, it is methodologically difficult to weigh the
pecuniary competitive disadvantages against the benefits.
It should be noted though that several recent studies highlight that globalisation of
business and investment activities has increased the demand for more transparent
accounting of corporate responsibilities encompassing human rights, social, economic
and environmental dimensions. Consequently, the relative competitive advantage of
proactive companies that engage in CSR activities over other companies might have
increased over time. However, as pointed out by Loikkanen and Hyytinen, for example,
the relationship between CSR measures and competitiveness vary among different
companies due to varying sectoral characteristics, including geography of markets and
production, company size, role in business and value and supplier chains. Thus, the CSR
impact on competitiveness may actually need to be examined in detail by each company
separately to arrive at meaningful conclusions.1231
Table 8.3: The impact of due diligence regulations on companies’
competitiveness
Study Impact on Competitiveness
National
Association of
Manufacturers
(2011) on Section
1502 of US Dodd-
Frank Act
Stress that the application of the rules only to reporting
companies would unfairly affect them relative to non-reporting
companies and damage their competitive position
Also refer to the market for auditing services and potential
scarcity of specified auditing services, which may result in higher
compliance costs for companies affected by the policy
Bayer and de Buhr
(2011) on Section
1502 of US Dodd-
Frank Act
Do not directly address the impact on companies’ relative
competitiveness, but make a few remarks about efficiency
Refer to joint industry initiatives, e.g. the creation of common
platforms for information collection, tracking, reporting and
auditing, to reduce the labour effort/cost burden on companies,
which would reduce the negative impact on companies’ relative
loss in competitiveness
IPC (2011) on
Section 1502 of US
Dodd-Frank Act
State that Compliance with the proposed rules will impose a
significant burden on all subject companies and their suppliers
Argue that non US issuers will remain outside the SEC‘s (the
policy scope’s) jurisdiction and therefore enjoy a significant
competitive advantage over US companies that do file reports
1231 Loikkanen and Hyytinen (2011). Corporate Social Responsibility and Competitiveness – Empirical Results and Future
Challenges. Chapter in book Environmental Management Accounting and Supply Chain Management (pp.151-170).
317
with the SEC
European
Commission (2013)
on Non-financial
Reporting
requirements
Authors argue that a strategic approach to CSR can bring
benefits in terms of risk management, cost savings, access to
capital, customer relationships, human resource management
and innovation capacity
Highlight a number of factors that can be relevant to a
company’s overall business success and competitiveness
respectively: lower cost of capital in terms of debt (loans and
bonds) and equity, competitive advantage in attracting,
motivating and retaining talented employees, consumer loyalty
Argued that failure to adequately manage relationships with
stakeholders can result in operational delays, higher costs of
insurance and security, problematic relations with governments
and local communities, and potential reputational damages
Distinguish between efficiency and competitiveness, whereby
efficiency relates to the implications for the administrative
burden resulting from compliance with the proposed policies.
Point out that some of the proposed measures would increase
companies ‘external competitive factors,’ while compliance costs
would generally increase, which negatively impact on forms cost
competitiveness
Voluntary measures (option 2c in the analysis) are stated to be
neutral with respect to the impact on compliance costs
With respect to the consultation conducted by the authors, it is
stated that none of those established in EU Member States where
more stringent mandatory disclosure requirements are already
enforced reported any competitiveness problems compared to
those established in Member States with less stringent legislation
It is outlined that EU companies would indeed have to bear
slightly higher costs than companies established or
headquartered in third jurisdictions where non-financial
disclosure is not regulated, i.e. EU companies’ global
competitiveness would decrease
Overall, it is stated that the additional administrative burden
would be fairly limited, and that the potential benefits are likely
to outweigh the cost, i.e. EU companies relatively more
competitive on a global level
Loikkanen and
Hyytinen (2011)
Highlight that link between CSR measures and competitiveness
varies for different companies due to a great number of varying
sectoral characteristics
1.1.4 Impact on SMEs
From an economic perspective, market regulations are often reported as a barrier to
market entry and an external factor decreasing companies’ competitiveness due to the
administrative costs that result from compliance requirements. For SMEs, regulations are
318
generally perceived as a hurdle to company-level growth although they are, as indicated
by a recent meta-study, not necessarily identified as a hurdle in principal.1232 The
reduction of red tape and bureaucracy is broadly welcomed as beneficial for SME growth.
At the same time, the literature on property rights and corruption, for example, suggests
that regulation is necessary to create a sense of stability and security as instability and
uncertainty can generally inhibit companies’ growth ambitions.
The European Commission explicitly recognises the specific needs of SMEs. The Small
Business Act (SBA), an overarching framework for the EU policy on SMEs, generally aims
to simplify the regulatory and policy environment for SMEs.1233 The Commission's
regulatory fitness and performance (REFIT) programme, which is part of the EU’s better
regulation agenda, paying particular attention to SMEs, aims to ensure that EU
legislation delivers results for small businesses effectively, efficiently and at minimum
cost.1234 A 2014 public consultation on the SBA found that administrative and legislative
burden is the top concern for EU SMEs (SBA 2014).
The literature on the impact of due diligence regulations on SMEs indicates that SME
businesses can be directly and indirectly affected by such policies (see Table 8.4). Many
studies distinguish between the impacts on SMEs that directly fall under the scope of the
regulations, e.g. publicly-listed SMEs in the case of the EU’s Non-financial reporting
Directive, and SMEs that are affected by second round effects, e.g. small companies that
have to report relevant information to corporate customers or suppliers that are directly
affected by the regulation, as in the case of the EU and US conflict minerals policies.
The major findings for company-level effects of due diligence and reporting requirements
for SMEs can be summarised as follows:
1) The relative administrative burden of SMEs (per unit cost of compliance) is
generally greater than for larger companies,
2) SMEs may have a competitive disadvantage vis-à-vis larger companies due to a
lack of human resources,
3) SMEs may suffer from tighter contractual obligations imposed by their large
corporate clients,
4) SMEs may not have the sufficient leverage to extract the necessary information
from their supply chain partners, especially if their supply chain extends to
foreign countries.
One study highlights the regulatory challenge to mandate principles of transparency and
accountability in the value chains without driving SMEs out of business. The latter notion
is considered important by the authors of this assessment of options as far-reaching
(broad in scope) human rights due diligence regulations may trigger costly second round
effects for SMEs.
However, it should also be noted that some of the literature relates reporting and
disclosure requirements, which may arguably operate disproportionately for SMEs who
1232 Beis (2018). Understanding the firm-level effects of regulations in the growth of small- and medium-sized enterprises. BEIS Research Paper Number 10. 1233 European Commission (2019). The small business act for Europe. Available at https://ec.europa.eu/growth/smes/business-
friendly-environment/small-business-act_en. 1234 European Commission (2019). REFIT – making EU law simpler and less costly. Available at
https://ec.europa.eu/info/law/law-making-process/evaluating-and-improving-existing-laws/refit-making-eu-law-simpler-and-
less-costly_en.
319
are effectively required to produce statements similar in length and detail to larger
companies. In this way, such studies may have limited relevance to due diligence
requirements as a standard of expected conduct, which requires a proportionate
response to existing risk.
Table 8.4: The impact of due diligence regulations on SMEs
Study Impact on SMEs
National
Association of
Manufacturers
(2011) on Section
1502 of US Dodd-
Frank Act
Impact on SMEs1235:
State that many SME manufacturers who are not subject to SEC
reporting will be affected by the regulation.
State that SMEs will face larger per unit cost increases because of
smaller business volumes, more limited resources to produce the
required documentation, and less leverage over their suppliers, both
foreign and domestic.
State the SMEs have a relative disadvantage as they lack
compliance staff.
Argue that SMEs may be pushed out of the market, which may
result in a shrinking the supplier base.
Bayer and de Buhr
(2011) on Section
1502 of US Dodd-
Frank Act
Highlight the challenge to mandate principles of transparency and
accountability in the value chains without excessively burdening the
private sector actors and driving smaller enterprises out of
business.
Consider companies with annual revenues of 100 million USD as the
threshold value between small and large companies.
IPC (2011) on
Section 1502 of US
Dodd-Frank Act
State that mandatory due diligence would impose significant
burdens especially those companies that are small businesses.
Argue that the proposed rules would present an extensive burden to
small and large companies, particularly in the initial years following
implementation.
Point out that larger companies will likely impose contractual
requirements on the small companies regardless of SEC exemptions
for small companies.
Argue that smaller companies may not have the leverage needed to
extract the necessary information from their supply chain, especially
if that supply chain extends outside the United States.
European
Commission (2014)
on Conflict Minerals
Distinguish between companies with less and more than 250
employees.
Lower absolute initial cost burden found for SMEs.
Lower absolute recurrent cost burden found for SMEs.
European
Commission (2013)
on Non-financial
Reporting
requirements
Argue that large companies and business associations expressed
concerns that stricter mandatory disclosure requirements could be
excessively burdensome, in particular for SMEs, and undermine
efforts that the industry is already taking on a voluntary basis and
negatively affect competitiveness.
State that publicly listed SMEs are already required to produce
corporate governance statements.
Argue that the impact on non-listed SMEs limited.
State that for non-listed companies, best corporate governance
1235 Kimpel, S. (2011). Memorandum on the Conflict Minerals Regulation. File No. S7-40-10. Available at
https://www.sec.gov/comments/s7-40-10/s74010-212.pdf
320
practices of SMEs can be encouraged on voluntary basis.
1.1.5 Industry and Aggregate Economic Impacts
Impact assessments of CSR and due diligence policies are mainly based on company-
specific case studies. At the same time, various studies are available for specific sectors
of the economy. However, data on the net economic impact, e.g. the impact after
weighing companies’ costs against the commercial benefits companies may gain are
rarely available. Existing studies generally conclude with a number of qualitative
assessments/statements about the impacts of certain CSR or due diligence policies.
RIMAS, for example, in 2011 conducted an analysis of CSR practices for the automotive
industry. The study concludes that car manufacturers are actively engaging in CSR
practices as they face environmental and health concerns and have to account for
changes in the regulatory environment. In addition, the authors state that customers
increasingly pose demands with respect to safety, comfort, and fuel efficiency in terms of
better cost/quality. As a result, car makers increasingly have to compete in terms of
both prices and corporate practices aiming to meet various societal goals. The authors
did, however, not conduct a quantitative cost-benefit analysis.1236
Mazur-Wierzbicka argues that European agricultural companies can apply CSR measures
to gain additional economic, social and environmental benefits without, however,
providing estimates for the size of these effects.1237
Martinuzzi et al. study how CSR policies can impact on the European textiles sector. They
argue that for industrial textiles manufacturers CSR shows some similarities to chemical
industry. CSR might be a driver of product quality, with positive feedback effects on
sales, and may reduce the environmental impact of production procedures. The authors
argue that CSR measures may therefore result in competitive advantage for the
industry, but they do not provide estimates for the costs and benefits.1238
It should be noted that the commercial impact of CSR and due diligence requirements
varies from company to company. This has generally been confirmed by the economic
impact assessments available for the EU’s Non-financial Reporting Directive and the
conflict minerals policies imposed by the EU and the US. To the knowledge of the authors
of this report, comprehensive economic impact assessments that quantitatively weight
the aggregate costs against the aggregate benefits are neither available on a sector nor
an economy-wide basis. However, some impact assessment provide aggregate numbers
for the overall cost impact (one-off costs and recurrent costs) to be borne by those
companies that are directly and indirectly affected by the regulations (see Annexure D,
Table 6 on total first-year costs and Table 7 on total recurrent costs).
1.2 Social Impacts
A large body of literature on CSR practices, usually case studies, focuses on a rather
broad range of issues related to social impacts, e.g. education, public health, community
1236 RIMAS (2011). CSR Activities and Impacts of the Automotive Sector. Working Paper No. 03/2011. Available at https://www.sustainability.eu/pdf/csr/impact/IMPACT_Sector_Profile_AUTOMOTIVE.pdf 1237 Mazur-Wierzbicka (2015). The Application of Corporate Social Responsibility in European Agriculture. Regional Studies on
Development, 19, 1, 2015. Department of Human Resource Management Faculty of Economics and Management University of
Szczecin. 1238 Martinuzzi, A., Kudlak, R., Faber, C. and Wiman, A. (2011). CSR Activities and Impacts of the Textile Sector. Research
Institute for Managing Sustainability (RIMAS) Vienna University of Economics and Business.
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welfare, entrepreneurship development, environment, commercial marketplace
development and rural development. These areas of the societal impacts of corporate
activities are usually not related to the core business functions of companies. With the
exception of large, publicly-listed companies, businesses’ activities in these areas are
generally not required by law and usually pursued on a voluntary basis.
The 2015 UN Global Compact bulletin outlines individuals and groups whose rights might
be impacted (positively and negatively) through a company’s operations and business
relationships. They distinguish between a company’s own employees and third-party
employees such as supply chain workers, contract workers and other business partners’
employees. It is also highlighted that people living in communities around production
facilities might be affected by companies’ operations, while others might be indirectly
affected by companies’ environmental footprint.1239
Women, indigenous people, elderly persons, persons with disabilities, children as well as
religious or ethical minorities are considered groups that are likely to face higher risks
regarding potentially harmful practices and impacts. According to an assessment of the
UN Global Compact (2016), problems associated with adverse social impact include, for
example, insufficient grievance mechanisms for affected groups, inadequate working
conditions for contract workers and casual labourers, excessive working hours,
discrimination against trade unions, unequal opportunities regarding hiring and
promoting women, adverse impacts of tourism activities on the local population (on their
environment, privacy, food security and traditional way of life etc.). The adverse impacts
of corporate activity on human rights and the environment are well-documented in
various studies and databases like the Business and Human Rights Resource Centre.
The OECD summarises that for workplace conditions, elements of ‘responsible business
practices’ include, for example, the respectful treatment of employees in matters related
to recruitment and selection, diversity and equal opportunity, work/life balance,
professional development and progression, and full entitlement to employment rights.1240
As concerns company-level impacts on companies who adopted and reported on CSR
activities, numerous studies confirm positive effects of CSR policies on a company’s
labour force. CSR activities can generally have a positive effect on human resources, and
they can increase the loyalty and motivation of employees, leading, for example, to
higher efficiency and productivity as well as better recruitment perspectives and lower
staff turnover rates.1241
For existing impact assessments, it should be noted that social impacts are generally
discussed in a qualitative way. Accordingly, impact assessments only indicate the
general direction of impact, but mostly do not provide numerical estimations. In
addition, available impact assessments do not provide sensitivity analyses, e.g. how
social impacts vary for different industries and jurisdictions.
The impact assessments on non-financial reporting requirements and due diligence
obligations largely focus on the potential impact on workers and working conditions.
Thereby a wide range of impacts on workers and employment conditions is covered, e.g.
1239 UN Global Compact Bulletin (2015). Available at: https://www.unglobalcompact.org/library/3051 1240 OECD (2016). Quantifying the Costs, Benefits and Risks of Due Diligence for Responsible Business Conduct Framework and
Assessment Tool for Companies- June 2016. Available at https://mneguidelines.oecd.org/Quantifying-the-Cost-Benefits-Risks-
of-Due-Diligence-for-RBC.pdf 1241 See Nielsen (2014); Szeltner, M. and Zukin, C. (2012); Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015).
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working conditions such as working hours, wages and salaries, discriminatory practices
related to gender, age, and nationality, and the representation of workers in companies’
decision-making bodies (see Table 8.5). However, the impacts on other rights-holders
who are not workers are less well-documented.
In the EU’s impact assessment on the EU Conflict Minerals Regulations, survey
respondents share mixed expectations regarding various social impacts (beyond just the
impact on workers) resulting from the proposed policies. About half of the respondents
do not expect social impacts resulting from the conflict minerals due diligence
procedures. The impact on workers and working conditions has not been addressed in
detail. Those who expected negative impacts mention that the regulations may
contribute to impoverishment and unemployment, embargos and losses in general
economic activity. Those respondents who expected positive impacts indicate that the
regulations may have a positive impact on political and social stability in the affected
regions, which might be conducive to economic activity.
In the EU’s impact assessment on the EU Non-financial Reporting Directive, the social
impact is mainly assessed for recruitment practices and the impact on affected
companies’ employees, while some information is given for aggregate employment
effects. It is argued that non-financial disclosure and reporting requirements would
contribute to more diversified boards and enhance equality of treatment and
opportunities for different groups of people (gender, age, nationality, background, etc.).
It is also stated that reporting obligations may result in more flexible corporate policies
regarding work life and family life. The authors also highlight that increased
transparency on employment-related matters could contribute to support better
employment relations and contribute to lower risks and costs associated with labour
conflicts. Regarding the impact on overall employment, it is stated that the proposed
policies could contribute in a limited extent to the creation of jobs in the field of CSR
(without an assessment of where these effects take place). Negative impacts on
employment, which could result from the higher costs of reporting, are considered
negligible due to the limited administrative burden of the proposed policies.
Table 8.5: Potential social impacts resulting from disclosure and due diligence
regulations
Study Potential social impacts
European
Commission (2014)
on Conflict Minerals
According to survey results, 55% of the respondent do not expect a
social impact of conflict minerals due diligence procedures (neither
positive nor negative).
According to survey results, 45% of the respondent do expect a
social impact of conflict minerals due diligence procedures (positive
nor negative).
As regards positive impacts, it is argued that conflict minerals due
diligence will have a positive impact on political and social stability
in the regions 60%), increase international awareness of the
underlying problems (27%), improve the environment (7%) and
contribute to the defunding of warlords (6%).
As concerns negative impacts, it is argued that conflict minerals due
diligence will contribute to impoverishment and unemployment
(22%), embargos and losses in economic activity (18%), increased
bureaucracy (18%), more corruption (16%) and an increase in
violence (5%), while 21% of the respondent did not anticipate
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‘further negative effects’.
European
Commission (2013)
on Non-financial
Reporting
requirements
Social impact is primarily assessed for recruitment practices and
impact on affected companies’ employees, while some information
is given for aggregate employment effects.
It is argued that non-financial disclosure and reporting requirements
would contribute to more diversified boards and enhance equality of
treatment and opportunities for different groups of people (gender,
age, nationality, background, etc.).
It is argued that the policies may have an indirect impact on the
reconciliation between private/family and professional life, e.g.
more women in key positions and more flexible policies regarding
work life and family life.
It is found that affected companies would be encouraged to better
identify potential risks relating to human rights, including labour
rights.
It is found that increased transparency on employees- and human
capital matters could contribute to support better employment
relations and contribute to lower risks and costs associated with
labour conflicts.
As concerns the impact on overall employment, it is stated that the
proposed policies could contribute in a limited extent to the creation
of jobs in the field of CSR, while negative impacts on employment,
which could result from the higher costs of reporting, are considered
negligible due to the limited administrative burden of the proposed
policies.
The EU Impact Assessment on the Timber Regulation1242 (for a more detailed description
of the EUTR, please see Table 1.2) assesses social impacts mainly regarding employment
effects in the forest industry. These employment effects seem to be deducted from the
estimated impacts on production resulting from the partial equilibrium modelling. The
method for calculating employment effects is the assumption that “a reduction in
production volume is coupled with a proportionate decline in employment”.1243 This is
projected to lead to a change in employment in forest industries as follows for:
Option 1 (Expansion of the FLEGT VPA approach): Projected to result in reduction
production of forest industries and employment in exporting countries to the EU
of -2.4% to 0.5% for 2009-2015 and -15.7% to 2.4% for 2016 – 2020. In the
EU, the changes in all regions are projected to be quite limited.
Option 3 (Border measures to prevent the importation of illegally harvested
timber): Projected to result in reduction production of forest industries and
employment in exporting countries to the EU of -0.4% to 0.3% for 2009-2015
and -0.8% to 0.4% for 2016 – 2020. In the EU, the border measures (option 3)
have almost no impact on the employment in forest industries.
Option 4A (Legislation which prohibits the trading and possession of timber and
timber products harvested in breach of the laws of the country of origin) & 4B
1242 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a Regulation of the European Parliament and the Council determining the obligations of operators who make timber and timber products available on the
Market. IMPACT ASSESSMENT Report on additional options to combat illegal logging. Available at:
https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf 1243 Indufor et al. (2008). Assessment of the Impact of Potential Further Measures to Prevent the Importation or Placing on the
Market of Illegally Harvested Timber or Products Derived from Such Timber, Final Report. Retrieved from:
https://ec.europa.eu/environment/forests/pdf/ia_report.pdf.
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(Legislation which requires that only legally harvested timber and timber products
be placed on the market): The impact on employment is projected to be modest.
The reason is that changes in production volume of forest industries are expected
to be very limited. Similarly, to the impact of border measures, the changes in EU
employment are very small.
Other social aspects are considered to depend on the extent to which social provisions
have been incorporated in the definition of legality. Social aspects relating to equal
opportunities, private life and access to social welfare systems are considered to not be affected and are not discussed.
The Impact Assessment1244 of the Seveso III Directive does not discuss impacts on
employment or other social impacts except for stating that impacts will vary or that
there is no significant impact expected.
No official impact assessment was found online on the EU Environmental Liability
Directive (ELD, Directive 2004/35/EC), only a report on the implementation of the
ELD1245 which does not assess any social or employment impacts. Similarly, the Impact
Assessment1246 on the EU Directive on the protection of the environment through
criminal law (Directive 2008/99/EC) does not assess any social or employment impacts.
An evaluation of the latter is ongoing, but there are no public results yet, the draft report
is expected for November.1247
1.3 Impacts on Human Rights
According to the UN Guiding Principles Reporting Framework, human rights due diligence
is: “An ongoing risk management process… in order to identify, prevent, mitigate and
account for how [a company] addresses its adverse human rights impacts. It includes
four key steps: assessing actual and potential human rights impacts; integrating and
acting on the findings; tracking responses; and communicating about how impacts are
addressed.”
While the sections above focused on impacts of due diligence frameworks and practices
at the company level, this section will flip the conversation and focus on due diligence
impacts for rights-holders. There are various kinds of due diligence practices with
varying effects on the ability of governments to meet their human rights obligations and
perform their duties, and for holders to demand their rights. To stay in line with the
purposes of this study, this section reviews the relevant literature on the impacts for
rights-holders from three different kinds of due diligence practices: 1) Voluntary due
diligence practices and guidelines; 2) Reporting requirements; and 3) Mandatory due
1244 See European Commission (2010). COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT Accompanying document
to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the control of major-accident hazards involving dangerous substances. Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52010SC1590. 1245 Brussels, 14.4.2016 COM(2016) 204 final REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN
PARLIAMENT Report from the Commission to the Council and the European Parliament under Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. Retrieved from:
https://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-204-EN-F1-1.PDF.
And COMMISSION STAFF WORKING DOCUMENT REFIT Evaluation of the Environmental Liability Directive Accompanying the
document Report from the Commission to the European Parliament and to the Council pursuant to Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. SWD/2016/0121 final. Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2016:121:FIN 1246 European Commission (2007). COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of the environment through criminal law
IMPACT ASSESSMENT. Retrieved from: https://ec.europa.eu/smart-
regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf. 1247 See: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2018-4981980_en
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diligence. While the literature on the implementation of due diligence requirements at
the company level is vast, the conversation around the actual impacts of due diligence
practices on specific human rights is limited.
Recognising this drawback, this section commences by reviewing the existing impact
assessments carried out prior to the implementation of relevant EU regulations as well as
implementation assessments after the implementation. Thereafter, this section reviews
the existing literature outlining positive impacts of the various forms of due diligence,
and finally concludes with a review of literature investigating respective challenges.
1.3.1 Pre-Implementation Impact Assessment Review
The table below summarises human rights impacts found in impact assessments carried
out prior to the implementation of relevant EU regulations. A common feature across
these evaluations is that the quantification of the effects on human rights are difficult to
trace. Positive human rights effects are often derived indirectly from changes in
companies’ conducts due to reputational concerns.
The table begins by analysing the EU Commission Impact Assessment on Additional
Options to Combat Illegal Logging. There is a well-acknowledged link between
corruption, organized crime, and the illegal exploitation of natural resources, including
forests. In certain countries where logging resources are plenty, profits are such that
they institutionalize corruption, undermine the rule of law, risk violent conflict, and
disregard respect for human rights. EU policy regarding illegal logging was set out in the
Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan of which one of its
key measures is a licensing scheme for the prevention of importing illegal logging into
the EU. The scheme would be implemented as part of the Voluntary Partnership
Agreements (VPAs). While the VPA approach was considered to be promising, it was
understood that it may have limitations. The EU FLEGT Action Plan therefore assessed
five additional measures including 1) expansion of the FLEGT VPA approach; 2) Further
development of voluntary measures by the private sector; 3) Border measures to
prevent the importation of illegally harvested timber; 4A) Legislation which prohibits the
trading and possession of timber and timber products harvested in breach of the laws of
the country of origin; 4B) Legislation which requires that only legally harvested timber
and timber products be placed on the market. While Option 4B touches on the risk of
accepting legality certificates from countries which might be in violation of serious
human rights abuses—and thus providing them with illegitimate credibility—the Impact
Assessment did not explicitly assess impacts for rights holders.
The table below follows by reviewing the EU Commission Impact Assessment of EU NFRD
Proposal1248. The EU NFRD was proposed in the frame that disclosure requirements had
not yet covered aspects of significance for rights holders, specifically regarding human
rights and corruption. Those that did disclose human rights aspects, included isolated
and anecdotal information. A key motivation for the EU NFRD proposal was the
longstanding recognition of transparency issues in holding companies accountable to
1248 Non-financial Reporting Directive (2014). Directive 2014/95/EU of the European Parliament and the Council of 22 October
2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large
undertakings and groups. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0095&from=DE
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respect their duties and responsibilities towards rights holders. Moreover, existing non-
financial reports often focus on less controversial issues and avoid discussion of any
negative human rights impacts. The Impact Assessment reviewed five possible policy
options including 1) voluntary annual statements; 2) mandatory detailed, stand-alone
non-financial reporting; 3) non-financial report on a “report or explain” basis; 4)
voluntary reporting; 5) mandatory EU standard. The assessment’s preferred options, 1
and 2a, are expected to have a beneficial impact on fundamental rights as they would
encourage EU companies to regularly review their policies and internal procedures in
various aspects, mainly due to a larger public scrutiny.
Thereafter the EU Assessment of Due Diligence Compliance Cost, Benefit and Related
Effects on Selected Operators in Relation to the Responsible Sourcing of Selected
Minerals1249, outlines the impacts of six policy options. The need for updated policy
options is founded on flaws within existing legislation such as the US DFA. According to
the assessment, while the OECD Guidance does not, others due diligence mechanisms,
such as the US DFA, are ambiguous about how to treat minerals in situations where
security forces are not perpetrators of serious human rights abuses for which a risk
management plan can be adopted. By engaging in mining and trading activities,
companies are at risk of contributing to the financing of non-state armed groups which
perpetuate conflict and the associated human rights abuses in conflict-affected and high-
risk areas.
As such, the impact assessment investigates six policy options for regulating these
activities including 1) Standalone EU Communication; 2) a “soft-law” approach; 3)
Voluntary regulation establishing obligations under an “EU responsible importer”
certification based on the OECD Guidance; 4) Mandatory regulation establishing
obligations under an “EU responsible importer” certification based on the OECD
Guidance; 5) a directive establishing obligations for EU-listed companies based on the
OECD Guidance; and 6) an import ban when EU importers of ores fail to demonstrate
compliance with the OECD Guidance. While the study does not explicitly assess human
rights impacts, options 3, 4, and 6 touch on possible indirect effects. Specifically, indirect
benefits based on reputation can be expected from Option 3 as a voluntary “EU
responsible importer” certification based on the OECD Guidance would encourage
demand for ethically and legitimately sourced minerals, leading to formalized mining
sectors, more sustainable development and benefits for local communities. However, if
such a certification becomes mandatory, such as in Option 4, the full reach of possible
benefits may be put at risk as companies may seek the easiest, least risky and
burdensome way of complying (avoiding sourcing from conflict-affected regions). This
could trigger negative impacts on local communities as mineral flows could be diverted
towards companies with lower standards and norms. Finally, the most effective of the
policy options is expected to be Policy Option 6, implementing a prohibition of imports
when EU importers of ores fail to demonstrate compliance with the OECD Guidance as
this ban would have indirect positive effects through increased government interventions
to ensure that due diligence is exercised.
1249 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Available at: https://eur-lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-
01aa75ed71a1.0001.01/DOC_1&format=PDF
327
The EU Impact Assessment of Directive 2008/99/EC on the protection of the
environment through criminal law, which lays down a list of environmental offences that
must be considered criminal offences by all Member States if committed intentionally or
with serious negligence, then reviews three policy options, with the first being no action
at the EC level. The second policy option consists of encouragement for cooperation
between Member States, and the third explored option regards minimum regulatory
standards. While the Impact Assessment does not specifically discuss human rights
impacts of Option 1 and 2, Option 3 does touch on indirect impacts. Option 3 is to set
minimum regulatory standards, which are expected to increase human health as the
harmonization of environmental offence definitions may facilitate targeting the most
serious cases. This will likewise increase sanction levels and extend the scope of liability.
The Seveso Directives are the main EU legislation dealing specifically with the control of
on-shore major accident hazards involving dangerous substances. The Seveso III
Directive came into force on 1 June 2015, replacing the Seveso II Directive. The EU
Impact Assessment of the Seveso III Directive investigates six possible policy options
including the first aimed at the alignment of Annex I to classification, labelling, and
packaging regulations (CLP) and the second policy option that builds on this to also
include other technical amendments to Annex I. Policy issue three then proposes
procedures for adapting Annex I in the future, policy issue four regards information to
the public and information management systems including reporting, and policy option
five discusses land-use planning. Finally, the sixth and final policy issue provides
clarifications to facilitate effective implementation. Impacts on human rights under all
possible options of the Seveso Directive depend on how many establishments will fall
under the Directive, and how many will be newly included within the scope. Where there
is a decrease in the number of establishments under the directive, this might lead to a
decrease in human and environmental health protection. However, where there is an
increase in scope, this would lead to an increase in protection. Specifically, under policy
option 4 which establishes information access to the public and the establishment of
information management systems including reporting, there would be positive impacts
on protection levels for human health (both for workers and the public) and the
environment.
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Table 8.6. Impact Assessments carried out prior to the implementation of regulation with potential human rights impacts
Pre-implementation Impact Assessments Human Rights Impacts
EU Commission Impact Assessment on Additional Options to Combat Illegal Logging (2008)1250,1251
Baseline scenario
No discussion of human rights impacts.
Option 1 – Expansion of the FLEGT VPA approach
Option 2 – Voluntary measures by the private sector further developed
Option 3 – Border measures to prevent the importation of illegally harvested timber
Option 4A – Legislation which prohibits the trading and possession of timber and timber
products harvested in breach of the laws of the country of origin
Option 4B – Legislation which requires that only legally harvested timber and timber
products to be placed on the market
Option 4B applies the requirement for certification of legality to all market
operations for timber products. The absence of an internationally agreed
definition of legality and the issue of what would constitute a credible
proof of it would represent a considerable challenge for the design of such
an approach as there would be a risk of accepting “legality” documents
from countries with serious credibility issues such as human rights abuses.
This might indirectly negatively impact responsibility towards rights
holders as those in violation might receive illegitimate credibility.
EU Commission Impact Assessment on EU NFRD Proposal (2013)1252
1250 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL determining the obligations of operators who make timber and timber products available on the Market. IMPACT ASSESSMENT Report on additional options to combat illegal logging. Available at:
https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf 1251 Indufor (2008). Assessment of the impact of potential further measures to prevent the importation or placing on the market of illegally harvested timber or products derived from such timber. Final Report. [online]
Helsinki, Finland: Indufor in association with European Forest Institute (EFI). Available at: https://ec.europa.eu/environment/forests/pdf/ia_report.pdf [Accessed 10 Sep. 2019]. 1252 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives
78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52013SC0127
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Option 0 – No policy change
Options 1 on an Annual Statement
The preferred options 1 and 2a are expected to have a beneficial impact
on fundamental rights as they would encourage EU companies to regularly
review their policies and internal procedures in various aspects, mainly
due to a larger public scrutiny. In particular, the nonfinancial disclosure
requirement is expected to have a positive impact on:
the workers' right to information (Article 27 of the Charter of
Fundamental Rights of the EU137)
human rights awareness within companies
reducing instances of EU company involvement in human rights
infringements
the right to non-discrimination (Article 21 of the EU Charter)
Equality between women and men (Article 23).
Freedom to choose an occupation and right to engage in work
(Article 15)
Freedom of expression and information (Article 11).
However, as the preferred policy options would not require processing of
personal data, they not impact rights to privacy and data protection
(Articles 7 and 8 of the EU Charter).
Option 2a Requiring a detailed, stand-alone non-financial report on a mandatory basis
Option 2b – Requiring a detailed non-financial report on a “report or explain” basis
(companies are allowed to explain why they have not reported).
The report only provides a preliminary assessment of impacts for the
preferred options: Option 1 and Option 2a. Option 2c – Voluntary reporting
Option 3 – Setting up a mandatory EU standard
330
EU Conflict Minerals – Assessment of Due Diligence Compliance Cost, Benefit and Related Effects on Selected Operators in Relation to the Responsible
Sourcing of Selected Minerals (2014)1253
Option 1 – Standalone EU Communication and Option 2 “Soft-law” approach There is no specific discussion on human rights impacts.
Option 3 – Regulation establishing obligations under an “EU responsible importer”
certification based on the OECD Guidance (Voluntary)
Indirect benefits based on reputation. This option would encourage
demand for ethically and legitimately sourced minerals, leading to
formalised mining sectors, more sustainable development and benefits for
local communities.
Option 4 – Regulation establishing obligations under an “EU responsible importer”
certification based on the OECD Guidance (Mandatory)
Companies may seek the easiest, least risky and burdensome way of
complying (avoiding sourcing from conflict-affected regions). This could
trigger negative impacts on local communities as mineral flows could be
diverted towards companies with lower standards and norms.
Option 5 – Directive establishing obligations for EU-listed companies based on the OECD
Guidance Similar impacts to Option 4.
Option 6 – Prohibition of imports when EU importers of ores fail to demonstrate
compliance with the OECD Guidance (Import ban)
Indirect positive effects through increased government interventions to
ensure that due diligence is exercised.
EU Impact Assessment of Directive 2008/99/EC on the protection of the environment through criminal law1254
Option 1 – No action on EC level No specific discussion on human rights impacts.
Option 2 – Encourage cooperation between Member States No specific discussion on human rights impacts.
Option 3 – Set minimum regulatory standards No discussion on direct human rights impacts. However, possible indirect
impacts include increase in human health as harmonization of environmental
offence definitions may facilitate the targeting of most serious cases. This will
1253 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due
diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. PART 1 (Impact Assessment). Available at: https://eur-
lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-01aa75ed71a1.0001.01/DOC_1&format=PDF 1254 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of the environment through
criminal law. IMPACT ASSESSMENT. Available at: https://ec.europa.eu/smart-regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf
331
likewise increase sanction levels, and extend the scope of liability.
EU Impact Assessment of Directive 2012/18/EU – Seveso III Directive1255
Policy Issue 1 – Alignment of Annex I to CLP; Impacts on human rights under all possible options of the Seveso Directive
depend on how many establishments will fall under the Directive, and how
many will be newly included within the scope. Where there is a decrease in the
amount of establishments under the directive, this might lead to a decrease in
human and environmental health protection. However, where there is an
increase in scope, this would lead to an increase in protection.
Policy Issue 2 – Other technical amendments to Annex I;
Policy Issue 3 – Procedures for adapting Annex I in the future
Policy Issue 4 – Information to the public and information management systems including
reporting
Specifically, under policy option 4 which establishes information access to the
public and the establishment of information management systems including
reporting, there would be positive impacts on protection levels for human
health (both for workers and the public) and the environment.
National Regulations
French Duty of Vigilance Law
No IA available.
Dutch Child Labour Due Diligence Law
Italian Decree on Due Diligence
Spanish Law on Environment and Human Rights
Swiss Advanced Legislative Proposal
1255 See COMMISSION STAFF WORLING PAPER. IMPACT ASSESSMENT Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the control of major-accident
hazards involving dangerous substances. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010SC1590&from=EN
332
1.3.2 Post-Implementation Impact Assessment Review
Regarding post-implementation studies, the Table 8.7 presents the human rights-related
conclusions of the Environmental Liability Directive (ELD) and the EU Timber Regulation.
While both regulations are of greater relevance for the assessment of environmental
impacts, both are worth a review for any links to impacts for rights holders.
Furthermore, the ELD does not involve reporting or due diligence requirements,
however, its evaluation provides relevant criteria to consider during the refinement and
design of policy options, namely, coordination and harmonisation with existing guidelines
and regulations, information availability, and the scope of different types of liability.
The European Commission’s Report on the Implementation of the Environmental Liability
Directive (2016), which establishes a framework based on the polluter pays principle to
prevent and remedy environmental damage, demonstrates that a key added value of the
ELD refers to the recognition of stakeholder’s rights. According to both the Estonian and
German Case Study Reports, up to date information on the notification of environmental
damage or threat of it and the rights of the persons concerned can be found online.
According to Articles 7(4) and 12 of the ELD, a person who could be affected by the
damage, or with a legitimate interest, as well as environmental NGOs, have rights to
request the implementation of prevention and remedial measures, by submitting the
relevant information. The competent authority is obliged to evaluate the request and to
notify the requestor of the decision.
EU Timber Regulation Implementation Reports are a series of biennial reports that
synthesize the results of the national reports submitted by all 28 EU Member States
providing a review of the implementation of the EU Timber Regulation (EUTR). The EUTR
is the first legal mandatory due diligence instrument at the EU level. As mandatory due
diligence is regarded as key for corporate sustainable responsibility under the UNGPs,
the regulation is notable. In accordance with Article 20(1), of the regulation EU Member
States and EEA/EFTA countries are required to submit a report on the implementation of
their actions every other year. These reports act as important monitoring and evaluation
tools as well as a way for stakeholders to share best practices. While the report does not
directly discuss human rights implications, section 1.4 on environmental impacts will
discuss the regulation in more depth.
333
Table 8.7. Post-implementation Impact Assessments
Post-Implementation Impact
Assessments/Studies Relevant findings
EU Directive 2004/35/EC – Environmental Liability Directive1256,1257
The ELD aims to establish “a framework for the
prevention and remedying of environmental damage
through a liability based on the ‘polluter-pays
principle’ in order to ensure that biodiversity is
restored or maintained at Favourable Conservation
Status, and thus halting biodiversity loss in the EU.”
It requires that “operators whose activity has
caused biodiversity damage or imminent threat of
such damage, to be held liable.”
An added value of the ELD refers to the
recognition of rights holders under the
directive. According to Articles 7(4) and 12
of the ELD, a person who could be affected
by the damage, or with a legitimate
interest, as well as environmental NGOs,
have rights to request the implementation
of prevention and remedial measures. The
competent authority is then obliged to
evaluate the request and to notify the
requestor of the decision.
EU Timber Regulation Implementation Reports1258,1259
As indicated above, the EUTR have three key
obligations: (1) The placing on the market of
illegally harvested timber or timber products is
prohibited; (2) Operators who are placing timber
and timber products on the EU market for the first
time are required to exercise due diligence (risk
management); (3) Traders of timber and timber
products already placed on the EU market are
required to keep record of their suppliers and
customers (obligation of traceability).
No discussion on human rights impacts.
1.3.3 Benefits and Challenges of the Different Policy Approaches
1256 Milieu Ltd., IUCN (2014). Experience gained in the application of ELD biodiversity damage. Final report for the European
Commission, DG Environment. [online] Brussels. Available at:
https://ec.europa.eu/environment/legal/liability/pdf/Milieu%20report%20-%20ELD%20Biodiversity%20Damage.pdf [Accessed
11 Sep. 2019]. 1257 The report describes the implementation challenges of the ELD based on the analysis of 10 EU Member States
environmental liability regimes. There are no pre-implementation impact assessments available for this regulation. 1258 See COMMISSION STAFF WORKING DOCUMENT Evaluation of Regulation (EU) No 995/2010 of the European Parliament
and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber Regulation). Available at: https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52016SC0034&from=EN 1259 See REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Regulation (EU) No 995/2010 of
the European Parliament and the Council of 20 October 2010 laying down the obligations of operators who place timber and
timber products on the market (the EU Timber Regulation). Biennial report for the period March 2015 – February 2017.
Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0668&from=EN
334
Voluntary Guidance on Due Diligence
As previously reviewed in the preceding sections, there are various voluntary
mechanisms for conducting human rights due diligence. The existing literature reviews
successful case studies and areas for possible expansion to enhance positive implications
of voluntary guidelines including the
1) UN Guiding Principles (UNGP);
2) OECD Due Diligence Guidance;
3) EU Conflict Minerals Regulation
4) Equator Principles;
5) IFC Performance Standards;
6) Voluntary Principles on Security and Human Rights (extractive sector);
7) International Council on Mining and Metals;
8) UNEP International Cyanide Management Code
The UN Guiding Principles on Business and Human Rights are probably the most central
texts in framing due diligence standards, and the most referenced in the conversation of
positive impacts. The principles are grounded on three key acknowledgments:
a) States’ existing obligations to respect, protect and fulfil human rights and
fundamental freedoms;
b) The role of business enterprises as specialized organs of society performing
specialized functions, required to comply with all applicable laws and to respect
human rights;
c) The need for rights and obligations to be matched to appropriate and effective
remedies when breached.
According to the literature, one of the key achievements of the Guiding Principles has
been to shift the approach to business and human rights from a retrospective liability for
corporate violations to a proactive one designed to prevent adverse human rights
impacts via due diligence. However, complications arise when identifying the responsible
party as the principles fail to clearly allocate duties and distinguish the requirements of
corporations from those of their third-party suppliers. As such, the literature proposes
that the principles have demonstrated benefits for proactively protecting rights-holders,
as long as corporations refrain from passing on the burden of due diligence down the
supply chain.1260 To avoid that this due diligence is passed along the supply chain, and in
order to set coherence between the Guiding Principles and the framework for companies’
actions, the responsibilities of business enterprises are defined in Guiding Principle 13.
This Guiding Principle establishes that business enterprises have a responsibility to:
avoid causing or contributing to adverse human rights impacts through their own
activities; and seek to prevent or mitigate human rights impacts that are directly linked
to their operations, products or services by their business relationships, even if they
have not contributed to those impacts.1261
1260 Jonathan Bonnitcha, Robert McCorquodale, The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and
Human Rights, European Journal of International Law, Volume 28, Issue 3, August 2017, Pages 899–919. Retrieved from:
https://doi.org/10.1093/ejil/chx042 1261UNHR Office of the High Commissioner. Guiding Principles on Business and Human Rights.(2011) Page 19. Accessed at
https://www.ohchr.org/documents/publications/GuidingprinciplesBusinesshr_eN.pdf
335
Beyond the transition from a retrospective to a proactive approach to protecting right-
holders, some authors have discussed potential additional benefits derived from the
Ruggie and UNGP framework1262. For instance, Sanders1263, has pointed out that
‘corporate responsibility to respect’ in the second pillar of the UN Guiding Principles
represents a promising analogy with the tort of negligence in domestic jurisdictions for
rights-holders to draw on. Developing the analogy in detail, Sanders concluded that the
similarities are more significant than any differences. Similarly, Van Dam has highlighted
the similarities between human rights due diligence and tort law principles across
common law and civil law jurisdictions.1264 Aftab has also highlighted the usefulness of
the UNGPs due diligence standard as a legal standard of care.1265
However, despite these similarities with the legal standard of care, this study’s country
case studies show that there are very few examples of cases where the UNGPs or its due
diligence expectations were successfully employed to demonstrate binding legal
obligations.
1262 UN Human Rights Council (2008). Promotion and protection of all human rights, civil, political, economic, social and
cultural rights, including the right to development. Report of the Special Representative of the Secretary-General on the issue
of human rights and transnational corporations and other business enterprises, John Ruggie. Available at:
https://www.business-humanrights.org/sites/default/files/reports-and-materials/Ruggie-report-7-Apr-2008.pdf 1263 Sanders, Astrid (2014). The Impact of the 'Ruggie Framework' and the United Nations Guiding Principles on Business and Human Rights on Transnational Human Rights Litigation. LSE Legal Studies Working Paper No. 18/2014. Available at:
https://ssrn.com/abstract=2457983 1264 Cees Van Dam ‘Tort Law and Human Rights: Brothers in Arms – On the Role of Tort Law in the Area of Business and
Human Rights’ (2011) JETL 221. 1265 Yousuf Aftab ‘The Intersection of Law and Corporate Social Responsibility: Human Rights Strategy and Litigation Readiness
for Extractive-Sector Companies,” 60 Rocky Mt. Min. L. Inst. 19-1 (2014).
336
Table 8.8: Literature on Positive HR Impacts of Voluntary Due Diligence Approaches
Study Key Findings Regulatory
Option
Relevant
Regulation Source
The Concept of Due Diligence
in the UN Guiding Principles
on Business and Human
Rights
A key achievement of the Guiding Principles has been to shift the focus
from retrospective to proactive. However, the UNGP are unclear
distinguishing requirements among actors along the supply chain.
2 UNGP
Bonnitcha J.,
McCorquodale R.,
2017
Human Rights
Responsibilities in the Oil and
Gas Sector: Applying the UN
Guiding Principles
While much positive progress is already being made by many in the sector
towards implementation of the Guiding Principles, work remains to be done
and this article has identified some of the challenges and complexities the
oil and gas sector continues to face in utilizing due diligence tools to
achieve human rights mandates.
2 UNGP
Lindsay R.,
McCorquodale R.,
Blecher L., Bonnitcha
J., Crockett A.,
Sheppard A., 2013
Tourism and water: from
stakeholders to rights-
holders, and what tourism
businesses need to do
To comply with due diligence, companies need policies and procedures to
undertake human rights impact assessments that they are currently lacking
in Bali. This is an extension of environmental and social impact and risk
assessments that many companies already routinely undertake. The
business opportunities from undertaking human rights impact assessments
were considered. If undertaken they can represent a significant potential
business opportunity for companies to show their responsibility for
respecting human rights, as well as for enhancing reputation, investor
confidence, staff retention, production and profitability, as well as brand
image.
n/a Stroma C., 2014
Tort Law and Human Rights:
Brothers in Arms On the Role
of Tort Law in the Area of
Business and Human Rights
Van Dam highlights similarities between human rights due diligence and
tort law principles, particularly in what in concerns the use of tort law to
prevent transnational corporations from being involved in human rights
violations either directly or via their subsidiaries and suppliers. Van Dam
clarifies that tort law looks at what a corporation ought to have known (and
ignorance of it is not a defence against liability), therefore carrying out ‘due
diligence’ for the corporation is not a choice but a duty.
n/a Van Dam C., 2011
337
The Intersection of Law and
Corporate Social
Responsibility: Human Rights
Strategy and Litigation
Readiness for Extractive
Sector Companies
The Guiding Principles are for Aftab a clear candidate to form the standard
of care that would be of reference once a duty of care has been
established. The principles could however not become the substantive basis
of a claim, but as the principles become a widely accepted standard for
human rights risk management, they can constitute a significant tool to
prove corporate negligence when corporate actions are not up to these
standards.
UNGP Aftab Y., 2014
What Conflict Minerals Rules
Tell us About the Legal
Transplantation of CSR
Standards without the State:
From the UN to the US to
Taiwan
This study investigates the effects of two forms of U.S. due diligence
(voluntary and mandatory) on foreign host country governance. In regards
to voluntary due diligence, the study finds that the Electronic Industry
Citizenship Coalition (EICC)’s Code of Conduct has caused changes in
company behaviour beyond US companies, but likewise Taiwanese
company behaviour. The study argues this change may demonstrate that
due diligence might have been transplanted into Taiwan through private
channels such as supply contracts, rather than through state governance.
The study likewise finds that companies shift behaviour more prominently
in response to the EICC code in comparison to the Dodd Frank Act
suggesting that bottom- up approaches may be more effective or more
easily accepted than public standards such as state laws enacted by a
foreign/national government in a top-down approach.
EICC Code of
Conduct Tsai & Wu, 2018
Dynamic Governance
Interactions: Evolutionary
Effects of State Responses to
Non-State Certification
Programs
This article examines how states have responded to the emergence of forest and fisheries certification programs, arguing that while structural management differences are of influence, state responses typically strengthen the non‐state program.
Gulbrandsen, Lars H., 2014
338
Investments in Weak
Governance Zones
While the summary of the 2005 consultations only touches on the ability of
responsible multi-national company behaviour to contribute to state
governance, it highlights opportunities. Specifically the consultations
concluded that both guiding principles by international organisations as well
as policies designed by home governments of companies investing in
foreign territory can and do play a role in helping weak governance
countries develop healthier institutions.
OECD, 2005
339
While literature focusing on positive impacts is scarce, a few studies spoke on
opportunities for sector-specific due diligence to impact human rights regarding the right
to water and occupational safety rights. For example, using Bali as a case study, Cole
Stroma investigates the possibilities of due diligence in the tourism sector to impact the
right to water and argues that there is an opportunity for companies to extend the
currently required environmental impact assessment to include human rights impact
assessments as well.1266 Furthermore, in the context of the oil and gas sector, Lindsay et
al. point out that while the Guiding Principles do not, of themselves, create new law, it is
evident that corporate ignorance of human rights duties can have legal consequences for
business enterprises operating in the oil and gas sectors (OGBEs) as a result of even
voluntary due diligence mechanisms, hence making companies more aware of the need
to respect human rights.1267
Regarding challenges, the literature is significantly more extensive in discussing
challenges for the aforementioned schemes to have positive human rights impacts. While
it has been established that the UNGPs make corporations more accountable to rights-
holders, the effectiveness of human rights due diligence is still in many respects
dependent on corporations’ willingness to act. According to Fasterling and Demuijnck,
this does not only represent a missed opportunity to increase the respect for human
rights commitments, but it could also depreciate the fundamental norms that voluntary
due diligence schemes aim to establish.1268 An even more fundamental challenge is the
fact that due diligence has not been homogenously defined across UN documents,
making it harder to implement. McCorquodale and Bonnitcha point out that the UNGPs
describe due diligence both as a process1269 that business should have in place to
monitor and avoid human rights impacts1270, and a standard of care similar to the legal
standard of due diligence.1271 In a 2009 report1272 to the UN Human Rights Council,
Ruggie1273 described due diligence as a standard of conduct1274 that companies should
meet to discharge their responsibility to respect human rights. In other words, the report
states that companies should act with due diligence to avoid infringing on the rights of
others.1275
1266 Stroma Cole (2014) Tourism and water: from stakeholders to rights holders, and what tourism businesses need to
do, Journal of Sustainable Tourism, 22:1, 89-106, DOI: 10.1080/09669582.2013.776062 1267 Rae Lindsay, Robert McCorquodale, Lara Blecher, Jonathan Bonnitcha, Antony Crockett, Audley Sheppard, Human rights responsibilities in the oil and gas sector: applying the UN Guiding Principles, The Journal of World Energy Law & Business,
Volume 6, Issue 1, March 2013, Pages 2–66, https://doi.org/10.1093/jwelb/jws033 1268 Fasterling B., Demuijnck G. (2013). Human Rights in the Void? Due Diligence in the UN Guiding Principles on Business and
Human Rights. Journal of Business Ethics. (Vol. 116, No. 4). Special Issue on Universal Ethics, Cultural Diversity and
Globalization – 17th IESE International Symposium. Pp. 799 – 814. Springer. 1269 Guiding Principle 17 states that business should carry out human rights due diligence and “The process should include
assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and
communicating how impacts are addressed.” 1270 Framework, Report to the UN Human Rights Council (Business and Human Rights Report), UN Doc. A/HRC/11/13, 22 April
2009, paragraph 25. This definition is consistent with the Framework Report stating that: due diligence – a process whereby companies not only ensure compliance with national laws but also manage the risk of human rights harm with a view to
avoiding it.’ 1271 Jonathan Bonnitcha, Robert McCorquodale, The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and
Human Rights, European Journal of International Law, Volume 28, Issue 3, August 2017, Pages 899–919. Retrieved from:
https://doi.org/10.1093/ejil/chx042 1272 A/HRC/11/13, 22 April 2009, para. 71 1273 UN Human Rights Council (2008). Promotion and protection of all human rights, civil, political, economic, social and
cultural rights, including the right to development. Report of the Special Representative of the Secretary-General on the issue
of human rights and transnational corporations and other business enterprises, John Ruggie. Available at: https://www.business-humanrights.org/sites/default/files/reports-and-materials/Ruggie-report-7-Apr-2008.pdf 1274 More specifically it was defined as diligence ‘reasonably expected from, and ordinarily exercised by, a person who seeks to
satisfy a legal requirement or to discharge an obligation’. 1275 Bonnitcha, J. and McCorquodale, R. The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and Human
Rights. The European Journal of International Law Vol. 28 no. 3 EJIL (2017), Vol. 28 No. 3, 899–919 doi:10.1093/ejil/chx042
© The Author, 2017. Published by Oxford University Press on behalf of EJIL Ltd.
340
In respect to the financial sector, Worsdorfer finds that the actual human rights due
diligence practices of the Equator Principles neither meet the minimum standards laid
down in the UNGPs or the IFC Performance Standards.1276 The current business and
human rights regime at multinational banks has serious consequences for rights-holders.
A perception that the Equator Principles are voluntary limits their impact due to a lack of
proper enforcement, monitoring and sanctioning. As such, the literature demonstrates
that the Principles are not able to prevent banks from financing projects containing
serious human rights abuses.
In regards to cross-border effects, while the literature on effects of due diligence on host
country state-governance capacity is sparse, opportunities are discussed. The 2005
OECD consultations on investment in weak-governance states only lightly touched on the
ability of responsible multi-national company behaviour to contribute to state
governance. However, the consultations concluded that both guiding principles by
international organisations as well as policies designed by home governments of
companies investing in foreign territory can and do play a role in helping weak
governance countries develop healthier institutions (OECD, 2005). Furthermore, a 2018
study investigated the effects of two forms of U.S. due diligence (voluntary and
mandatory) on foreign host country governance. In regards to voluntary due diligence,
the study finds that the Electronic Industry Citizenship Coalition (EICC)’s Code of
Conduct has caused changes in company behaviour beyond US companies, but likewise
Taiwanese company behaviour. The study argues this change may demonstrate that due
diligence might have been transplanted into Taiwan through private channels such as
supply contracts, rather than through state governance. The study likewise finds that
companies shift behaviour more prominently in response to the EICC code in comparison
to the Dodd Frank Act suggesting that bottom- up approaches may be more effective or
more easily accepted than state laws enacted by a foreign/national government in a top-
down approach (Tsai & Wu, 2018). Finally, a 2014 study examines how states have
responded to the emergence of forest and fisheries certification programs, arguing that
while structural management differences are of influence, state responses typically
demonstrate support by strengthening non‐state program. While the study assesses
effects on the forestry and fisheries sectors, results may be informative for state-
governance shifts across sustainability issues (.Gulbrandsen, 2014).
1276 Worsdorfer M. (2015). The Equator Principles and Human Rights Due Diligence – Towards a Positive and Leverage-Based
Concept of Corporate Social Responsibility. Springer International Publishing. DOI: 10.1007/s40926-015-0014-6
341
Table 8.9: Literature on Challenges of HR Impacts of Voluntary Due Diligence Approaches
Study Key Findings Regulatory
Option
Relevant
Regulation Source
Human Rights in the Void? The effectiveness of the 'human rights due diligence' is in many respects
dependent upon the moral commitment of corporations. 2 UNGP
Fasterling B.,
Demuijnck
G., 2013.
The Concept of Due Diligence in
the UN Guiding Principles on
Business and Human Rights
While the UNGPs distinguish quite clearly what the expectations are for
individual business operations versus those of actors along their value chain,
they do not clarify when the different relationships apply (cause, contribute,
directly linked). They additionally fail to indicate how far down the supply /
value chain duties are to be implemented.
2 UNGP
Bonnitcha J.
&
McCorquodale
R., 2017
The Equator Principles and
Human Rights Due Diligence -
Towards a Positive and Leverage-
based Concept of Corporate
Social Responsibility
The actual human rights due diligence practices of major (EP) FIs do neither
meet the minimum standards laid down in the U.N. Guiding Principles on
Business and Human Rights (and in the IFC Performance Standards).
2
Equator
Principles;
Leverage-based
CSR; IFC
Performance
Standards
Worsdorfer
M., 2015.
Governance of Mineral Supply
Chains of Electronic Devices
Both Mandatory and Voluntary frameworks establish due diligence
approaches. However, none of the approaches assessed are sufficiently
transparent or credible in their implementation to infer any concrete
implications for benefits to rights-holders.
2 UNGP
Sydow J.,
Reichwein A.,
2018
342
Voluntary Certification Schemes and Conflict Minerals
Increasing focus on human rights due diligence— both voluntary and mandatory —
created a unique and growing new market. While assurance and certification companies
can be seen as tools for compliance with mandatory human rights due diligence
requirements, such as the US Dodd-Frank Act, a plethora of certification schemes can
also be defined as voluntary mechanisms focused on consumer information and
perception of a product. This is particularly clear in the literature around conflict
minerals, following the success of the Kimberley Process Certification Scheme in 2003.
The extractive minerals industry is unique in the discussion of voluntary due diligence
mechanisms for the benefit of rights-holders because of the difference in incentive
structures for companies to prove their social sustainability to clients and consumers.
1) Initiative for Responsible Mining Assurance
2) Better Sourcing Program
3) International Tin Supply Chain Initiative (iTSCi)
4) CTC Standards Certification (BGR)
5) Conflict Free Gold Standard
6) Responsible Minerals Initiative
7) Fairtrade Gold Standard
8) Responsible Aluminium Stewardship
9) Responsible Business Alliance
10) Responsible Gold Guidance (LBMA)
11) Responsible Jewellery Council
12) SA 8000
13) Kimberley Process Certification Scheme
14) Global Reporting Initiative
However, focusing on actual human rights impacts, a study by German Watch,
demonstrates that audits and certification schemes alone, even independent and high-
quality ones, are not sufficient to ensure that an approach is credible and has any
benefits for rights-holders.1277 The following tables were put together to summarize the
findings from German Watch’s study demonstrating that while some voluntary due
diligence practices in the mining industry ensure proactive compliance with an extensive
set of human rights, the absolute effects are meaningless without credible and
transparent reporting processes. The study developed a set of criteria to classify the
levels of credibility and transparency among the voluntary certification schemes. The
tables below demonstrate the human rights covered by each column of a certification
scheme (in grey), and the level of credibility of each by the schemes represented by
their highlighted colour at the top:
Red: Not credible and transparent
Yellow: Somewhat transparent, but not fully credible
Green: Credible and transparent
1277 Sydow J., Reichwein A. (2018). Governance of Mineral Supply Chains of Electronic Devices: Discussion of Mandatory and
Voluntary Approaches in Regard to Coverage, Transparency and Credibility. Germanwatch e.V.
343
Table 8.10: HR Scope and Credibility of Voluntary Approaches
Mines 3TG Minerals More than 3TG or other Minerals
Vo
lun
tary
Prin
cip
les
on
Secu
rit
y a
nd
HR
In
tern
ati
on
al
Co
un
cil
on
Min
ing
an
d M
eta
ls
Glo
bal
Rep
orti
ng
In
itia
tive
In
tern
ati
on
al
Cyan
ide
Man
ag
em
en
t C
od
e
SA
80
00
IR
MA
Bett
er
So
urcin
g
Pro
gram
CT
C
Sta
nd
ard
s
Certi
ficati
on
Co
nfl
ict-
free
Go
ld
Min
ing
Resp
on
sib
le
Min
erals
In
itia
tive
iTS
Ci
Fair
trad
e
Go
ld
Sta
nd
ard
Resp
on
sib
le
Alu
min
ium
Ste
ward
sh
ip
Resp
on
sib
le
Bu
sin
ess
All
ian
ce
Resp
on
sib
le
Go
ld
Gu
idan
ce (
LB
MA
)
Resp
on
sib
le
Jew
ell
ery
Co
un
cil
DM
CC
Forced Labour
Human Trafficking
Child Labour
Violence by State or
Private Forces
Rape and Forced
Prostitution
Financing of Armed
Groups
Workers’ Rights –
Health and Safety
Workers’ Rights – Fair
Payment
Workers’ Rights –
Health Insurance for
Occupational Injuries
Livelihood of local
population
Mining by locals
Cultural Rights
Forced Resettlement
Compensation for
Resettlement
344
As is demonstrated by the tables above, the study communicates that numerous
frameworks focus on specific issues, while others cover nearly all identified risks.
However, the efficiency of these approaches is questionable as there are significant
drawbacks regarding transparency of implementation and overall credibility. As such,
companies conducting due diligence cannot be sure that human rights risks are
legitimately addressed by the certified supplier. None of the assessed initiatives or
guidelines met 100% of the criteria developed by German Watch to define it as fully
credible and transparent. As such, the study concludes that the EU regulation on
responsible mineral sourcing, or the US Dodd-Frank Act, must ensure that such schemes
for accreditation provide for close monitoring to ensure that companies refrain from
transferring their responsibility to protect rights-holders, and perform proper due
diligence, to misleading certification schemes.
Mandatory Due Diligence
Reporting Requirements
Reporting requirements, which require companies to report on their due diligence steps
are common. Examples are found across industries and across jurisdiction at both sub-
national and national levels. The existing literature reviews successful case studies and
areas for possible expansion to enhance positive implications of reporting requirements
including:
1) Section 1502 of the US Dodd-Frank Act;
2) California Transparency Act;
3) UK Modern Slavery Act
4) EU Non-Financial Reporting Directive. Directive 2014/95/EU. This directive lays
down the rules on disclosure of non-financial and diversity information by large
companies and makes it mandatory for companies to include non-financial
statements in their annual reports from 2018 onwards.1278
The effectiveness of reporting requirements in increasing protection for rights-holders is
a frequently debated topic. Much of the literature focuses on company-level impacts
relating to compliance and transparency. However, reporting requirements are
frequently perceived to be procedural requirements which do not lead to substantive
impacts. According to the literature, when reporting and due diligence requirements are
detailed and include requirements for collaboration with external stakeholders as well as
compliance mechanisms they are more likely to create substantive impact.
1278 European Commission Official Website. Accessed at https://ec.europa.eu/info/business-economy-euro/company-reporting-
and-auditing/company-reporting/non-financial-reporting_en#companies-that-must-comply
345
Table 8.11: Literature on Positive HR Impacts of Mandatory Reporting Requirements as Due Diligence Approaches
Study Key Findings Regulatory
Option Relevant Regulation Source
Hardening soft law: Are the
emerging corporate social
disclosure laws capable of
generating substantive
compliance with human
rights?
Without any mechanism to encourage compliance with the legal
requirements of transparency and due diligence, the uptake by
companies of due diligence requirements may be limited. This has
played out in practice via the implementation of the Modern Slavery Act
in the UK. The introduction of civil (and criminal) penalties where human
rights violations have occurred would significantly strengthen
requirements.
3
US Dodd-Frank Act;
California Transparency
Act; UK Modern Slavery
Act; French Duty of
Corporate Vigilance Law
Nolan J.,
2018
Source Intelligence; Conflict
Minerals Appeals Court
Ruling has No Impact on
Filing Obligations
Companies' course of action is not necessarily affected by due diligence
requirements such as the Dodd-Frank Act because they recognize public
opinion is overwhelmingly in favour of transparency in the responsible
production of goods.
3 US Dodd-Frank Act
Source
Intelligence,
2014
Big Drop Reported in Child
Labour in Cambodia Fashion
Factories
Better Factories Cambodia, a U.N. International Labour Organization and
World Bank initiative, found just 10 cases of child labour, down from 74
in 2014, in its latest survey of almost 500 licensed garment export
factories. However, there are significant difficulties in formal reporting
requirements of the informal sector.
N/A Asia News
Monitor, 2018
2018 Research Report. The
state of corporate
sustainability disclosure
under the EU Non-Financial
Reporting Directive1279
This study assessed whether companies provided the type of
information explicitly required by the NFR Directive. The study finds that
over 90% of companies express in their reports a commitment to
respect human rights and over 70% endeavour to ensure the protection
of human rights even in their supply chains. As in other areas, a
majority of companies, however, do not provide any information that
would allow a stakeholder to understand how this commitment is put
Directive 2014/95/EU
Alliance for
Corporate
Transparency,
2019
1279 Alliance for Corporate Transparency. 2018 Research Report. The State of corporate sustainability disclosure under the EU Non-Financial Reporting Directive. The Alliance for Corporate Transparency project analysis
of companies’ reporting.(2019) Accessed at http://www.allianceforcorporatetransparency.org/
346
into practice.
Only 36% describe their human rights due diligence system, 26%
provide a clear statement of salient issues and 10% describe examples
or indicators to demonstrate effective management of those issues.
347
While this report has reviewed a scarce pool of literature speaking to the positive
implications of reporting requirements on human rights impacts, the literature on
existing challenges is far more extensive. The existing literature reviews case studies
and areas for possible improvement to mitigate negative implications of mandatory
reporting requirements, including the UK Modern Slavery Act and the US Dodd-Frank
Act.
According to an independent review led by Amnesty International, the UK Modern
Slavery Act has failed to compel companies to respect their duties and implement proper
due diligence. Weak monitoring and enforcement, of an already lenient reporting
requirement, has allegedly meant that almost half of all companies under the
legislation’s jurisdiction have failed to publish a statement. While various companies
have released a first statement, they are reported to have failed to follow up, and
perceive the regulation as a procedural exercise rather than a substantive act.
Unsurprisingly, the study finds that the most comprehensive reports are submitted by
companies that were already engaged in conducting human rights impact assessments
along their supply chain before the implementation of the Act.
348
Table 8.12: Literature on Challenges of HR Impacts of Mandatory Reporting Requirements as Due Diligence
Studies Key Findings Regulatory
Option
Relevant
Regulation Source
Independent Review of the Modern
Slavery Act - Joint Submission from
Amnesty International UK, Anti-
Slavery International, Business &
Human Rights Resource CENTRE,
core Coalition, Fairtrade
Foundation, Freedom United and
ShareAction
Three years on from its introduction, it is apparent that the
legislation’s impact is seriously limited by shortcomings in the
reporting requirement, in combination with inadequate
monitoring and enforcement.
3 UK Modern
Slavery Act
Amnesty International
UK; Anti-Slavery
International; Business &
Human Rights Resource
Centre; CORE Coalition;
Fairtrade Foundation;
Freedom United and
ShareAction. 2018.
Business and Human Rights in
Brazil: exploring human rights due
diligence and operational-level
grievance mechanisms in the case
of Kinross Paracatu gold mine
The biggest challenges in real impact for rights-holders lies on
the inability of affected stakeholders to seek redress from a
company that tries to excuse itself by showing compliance with
policies based on internationally accepted procedures.
3 Turke M., 2018
Can we make them obey? US
Reporting Companies, their Foreign
Suppliers, and the Conflict Minerals
Disclosure Requirements of Dodd-
Frank
Until the international community collectively commits to end the
conflict minerals trade, § 1502 and the SEC conflict minerals rule
will not effectively achieve their intended benefits as due
diligence burden will be passed down the levels of the supply
chain rather than have significant benefits to rights-holders.
3 Harline M S., 2015
Workplace Human Rights
Reporting: A Study of Australian
Garment and Retail Companies
This research suggests that the soft disclosure regulation and
oversight by the state, and the numerous failed attempts at
introducing hard regulation, provide scope for corporations to
avoid taking corrective action against human rights violations, if
any. This study is unique as it shows that a soft regulatory
environment, preserved by multiple failed attempts at
introducing corporate human rights disclosure legislation,
contributes to inadequate corporate disclosure practices.
3 Azizul Islam M., & Jain A.,
2013
Big Drop Reported in Child Labour
in Cambodia Fashion Factories
There are significant difficulties in formal reporting requirements
of the informal sector. Asia News Monitor, 2018
349
The literature likewise draws on a plethora of sector specific legislation to demonstrate
gaps in compliance across countries. After its mission to Brazil in 2015, a United Nations
working group report concluded that “human rights risks were mainly seen as risks to a
company’s operations, rather than risks faced by vulnerable rights-holders” (Turke M.,
2018). According to a his study, the largest gold mine in Latin America, led by a
Canadian company, shows policy commitment to human rights norms and due diligence
requirements, but continues to be a cause of negative human rights impacts in the city
of Paracatu, Brazil. While the company adheres to international guidance on human
rights, local communities still claim to be impacted by health, infrastructural and
environmental damages. According to Turke (2018), this demonstrates that without
robust grievance mechanisms, reporting requirements are somewhat futile. Companies
will aim to excuse themselves by pointing to procedural compliance and policies based
on internationally accepted principles such as the UNGP (ibid.).1280
Similarly, a study by Deakin University and Queensland University of Technology
investigated workplace human rights disclosure practices by 18 major Australian
garment and retail companies that source products from developing nations.1281 The
investigators, Islam and Jain, found that the selected corporations only reported less
than half of the specific disclosure categories. The research confirms arguments
prominent in the literature that the lack of enforcement in mandatory reporting
requirements provides space for corporations to only partially comply, and places
impedes rights-holders’ ability to benefit from such requirements.1282
Finally, and quite interestingly, Better Factories Cambodia, a joint initiative of the
International Labour Organization and the International Finance Corporation (World Bank
Group) initiative, found that child labour decreased significantly in Cambodia as an effect
of reformed due diligence practices (Asia News Monitor, 2018). However, the study
warns that there are significant difficulties in formal reporting requirements of the
informal sector, as children turned away from monitored factory jobs may be pointed to
work in homes and informally subcontracted to produce garments.
Judicial or economic penalties
The French National Assembly adopted the Duty of Vigilance Law in 2017, and
accordingly it is too early to investigate its impacts on human rights. To date, France is
the only country with a national law requiring general mandatory due diligence
requirements of this scope. Similarly, the Netherlands adopted its Child Labour Due
Diligence Law at the time of drafting of this report (May 2019). As a result, the literature
on positive impacts of mandatory due diligence regulation as envisioned within the
subject of this study is scarce.
However, longer established regulatory instruments which have certain similarities with
these general due diligence duties may provide helpful comparisons, although the
limitations resulting from their differences should be acknowledged. For example,
Section 1502 of the US Dodd-Frank Act was signed into law in 2010, requiring publicly
traded companies to ensure that the raw materials they use to make their products are
1280 Turke M. (2018). Business and Human Rights in Brazil: Exploring Human Rights Due Diligence and Operational-Level
Grievance Mechanisms in the case of Kinross Paracatu Gold Mine. Brazilian Journal of International Law. (Vol. 15, No. 2). DOI:
10.5102/rdi.v15i2.5357 1281 Azizul Islam M., Jain A. (2013). Workplace Human Rights Reporting: A Study of Australian Garment and Retail Companies.
Australian Accounting Review. (Vol 23, No. 65, Issue 2). doi: 10.1111/auar.12009 1282 Ibid.
350
not tied to the conflict in Congo. The Enough Project conducted field research in 2015
and 2016 in Eastern Congo with miners, traders, human rights activists, civil society
leaders, and foreign industry experts, to assess impacts of the legislation. The
investigation found direct positive impacts including increased security for civilians in
some mining areas and a significant reduction in armed group control in 3T mining
areas. Additionally, a few indirect advances for rights-holders were found around
improved safety and health standards for miners, and the implementation of a regional
certification system for mines as conflict-free. When 193 mines were assessed under this
certification scheme in Eastern Congo to investigate conflict and child labour, 166 of the
mines (86%) successfully passed the assessment. Furthermore, according to the Enough
Project (2015), the year 2015 saw a record amount of certified conflict-free tantalum
exported from eastern Congo — a 387% increase since 2013. Moreover, looking at tin,
tantalum, and tungsten mines together, 70% of those investigated by the International
Peace Information Service in 2014 were conflict-free.
Despite these positive improvements on the ground, it is important to note that a study
conducted by Global Witnesses and Amnesty International showed that many US
companies are failing to comply with this mandatory due diligence. More specifically, the
study analysed 100 conflict minerals reports filed by US companies in response to the
2010 Dodd Frank Act. This analysis found that 79 of these companies failed to meet the
minimum requirements established by the law, that only 16% of them were going
beyond their direct suppliers to attempt to contact those down the production chain, and
that more than half of the companies sampled did not report to senior management
when they identified a risk in their supply chain.1283
Concerning challenges, as mentioned above, existing examples of mandatory due
diligence requirements for human rights and environmental impacts are rare. The
primary example is the French Duty of Vigilance Law, which is too new to have
generated information regarding its impacts.
As a result, this assessment is again reliant on the literature relating to examples of laws
with comparative features. It is acknowledged that these comparisons have limited
usefulness due to the narrower focus of these laws or the different kind of obligations
which they create. Within this context, the literature demonstrates that the impacts for
rights-holders could result in unintended consequences when mandatory due diligence
obligations are imposed only for certain geographical regions, allowing businesses to
move to other areas of supply where these due diligence requirements do not apply.
While the UNGPs make explicitly clear that due diligence should not lead companies to
terminate their business in a specific region, but rather exercise leverage to try and
improve conditions, the literature demonstrates where the law does not apply to a
company’s global operations, it does indeed risk the movement of businesses.This has
been the case for the US Dodd Frank act. As a study by the University of Texas School
Of Law suggests, Section 1502 of the Dodd-Frank Act has essentially created a de facto
embargo on the entire mining industry in the DRC. Companies found it simpler to
withdraw from the area rather than to justify business associations with conflict. This
sudden change caused the demand of minerals in the area to drop by 90%, placing the
economic burden on a vast population of civilians that depended on the market’s income
1283 Amnesty International and Global Witness. Digging for Transparency. How US companies are only scratching the surface of
conflict minerals reporting (2015) Accessed at https://www.globalwitness.org/en/campaigns/conflict-minerals/digging-
transparency/
351
for their livelihood. According to the study, this has had negative impacts relating to the
right to food, the right to education, and the right to health.1284 Furthermore, research
from the UN Group of Experts report on the Congo found that gold from mines controlled
by rebel groups such as Nduma Defense of Congo (NDC) headed by Ntabo Ntaberi Sheka
who is wanted by Congolese authorities for crimes against humanity, was smuggled into
Uganda last year.1285 However, this phenomenon could presumably be linked to the
mechanism’s narrow application to a specific geographical region, which may not apply if
the due diligence requirements were imposed on a wider group of businesses operating
globally.
1284 Owen M. (2013). The Limits of Economic Sanctions Under International Humanitarian Law: The Case of the Congo. Texas
International Law Journal. (Vol. 48., No. 103) 1285 Amnesty International and Global Witness. Digging for Transparency. How US companies are only scratching the surface of
conflict minerals reporting (2015). Page 32. Accessed at https://www.globalwitness.org/en/campaigns/conflict-
minerals/digging-transparency/
352
Table 8.13: Literature on Challenges of HR Impacts of Mandatory Due Diligence Approaches
Study Key Findings Regulatory Option Relevant Regulation Source
The Kimberley Process
Certification System -
KPCS and Diamond
Production Changes in
Selected African
Countries and Brazil
In summary, the KPCS imposed control and, in
response, abuses implemented by the industry
financed government have not been mitigated while
various crimes have emerged in the move of diamonds
to the informal market such as; smuggling; illegal
production; invasion of indigenous lands and
environmental reserves; disrespect to environmental
legislation; robberies; deaths and other crimes.
4.1 / 4.3 (b) KPCS Gomes dos Santos E.,
2015
Unintended
Consequences of
Sanctions for Human
Rights: Conflict Minerals
and Infant Mortality
While meant as a boycott on products that may
finance warlords and armed militias, the study
suggests that the legislation-induced boycott reduced
mothers’ consumption of infant health care goods and
services.
4.1 / 4.3 (b) Dodd-Frank Act Parker D., Foltz J., Elsea
D., 2016
The Limits of Economic
Sanctions Under
International
Humanitarian Law: The
Case of the Congo
The withdrawal of international corporations from the
Congo has reduced the legitimate minerals trade by
ninety percent, penalizing hundreds of thousands of
civilians across the Great Lakes region who depend on
this trade for their livelihood.
4.1 / 4.3 (b) Dodd-Frank Act Owen M., 2013
The elephant in the
room: offshore
companies, liberalisation
and extension of
presidential power in DR
Congo
The study notes that while the Congolese government
voiced support for the Dodd-Frank Act, donors
continued to hold reservations regarding government
behaviour. However, despite such reservations, they
continued to operate in Congo on the basis that it was
a special case for the need to safeguard international
investment in a wider sense.
Dodd-Frank Act Marriage, 2017
What Conflict Minerals
Rules Tell us About the
Legal Transplantation of
CSR Standards without
the State: From the UN
This study investigates the effects of two forms of U.S.
due diligence (voluntary and mandatory) on foreign
host country governance. In regards to mandatory due
diligence, the study finds that the Dodd-Frank Act is
less effective in shifting governance capacity of the
Dodd-Frank Act Tsai & Wu, 2018
353
to the US to Taiwan host country as domestic companies change behaviour
less prominently than in comparison to voluntary
guidelines. The study suggests that bottom- up
approaches may be more effective or more easily
accepted than public standards such as state laws
enacted by a foreign/national government in a top-
down approach.
354
A 2016 study by the University of Wisconsin-Madison confirmed this argument, outlining
that while the conflict-minerals section of the 2010 Dodd-Frank Act has succeeded in its
mission of decreasing the financing of warlords and conflict in East Congo, it has also
had unexpected negative effects on rights-holders in the area.1286 By dis-incentivizing
companies from sourcing tin, tungsten, and tantalum from the Congo, the Act placed
somewhat of a de facto boycott on mineral purchases. Estimating the impact on the
mortality of children born before 2013, the study finds that it increased the probability of
infant deaths in villages near the policy-targeted mines by at least 143 percent. Similarly
to the literature on burden allocation of economic sanctions, the paper suggests that the
Act’s boycott reduced mothers’ means to purchase health care goods and services for
their infants.1287 What is more, another recent study has suggested that for territories
with an average number of gold mines, the introduction of Dodd-Frank increased the
incidence of battles with 44%; looting with 51% and violence against civilians with 28%,
compared to pre-Dodd Frank averages.1288 However, the evidence on positive versus
negative impacts of the Dodd-Frank Act is inconclusive as some studies are argued to
exaggerate positive impacts, while others are claimed to exaggerate negative impacts.
An August 2018 study by Radboud University found that academic studies investigating
negative unintended consequences of the Dodd-Frank Act in the Congo are largely
relying on outdated and skewed data. The authors argue that while negative unintended
effects were declining in the region, companies that stood to gain from deregulation
omitted such changes from their records (Koch & Kinsbergen, 2018).
Beyond legislation such as the US Dodd-Frank Act, there have also been prior attempts
to include processes to protect the environment and human rights when companies
operate on the ground using certification schemes. One of the most notable ones has
been the Kimberley Process. The Kimberley Process is a multilateral trade regime
established in 2003 with the goal of preventing the flow of conflict diamonds. The core of
this regime is the Kimberley Process Certification Scheme, under which States
implement safeguards on shipments of rough diamonds and certify them as conflict
free.1289 Under this certification scheme the member states must ensure that the
diamonds that must be exported with a Kimberley Process Certificate should not finance
rebel groups, and that none of the diamonds imported to their country come from a non-
member of the scheme. This translates into the need for countries to establish
legislation, institutions, and import/export controls,1290 but unlike the due diligence
requirements we have outlined before, the certification scheme does not impose
requirements specifically on businesses. This puts governments in a difficult position as
they must penalize the companies that are at the same time funding their existence via
the payment of ludicrous taxes, particularly in countries where a high percentage of
government revenues come from the extractive sector, for instance in Nigeria, the
extractives sector has represented 74% of the government revenue at some points.1291
1286 Parker D., Foltz J., Elsea D. (2016). Unintended Consequences of Sanctions for Human Rights: Conflict Minerals and Infant
Mortality. Journal of Law and Economics (Vol. 59). University of Chicago. 1287 Parker D., Foltz J., Elsea D. (2016). Unintended Consequences of Sanctions for Human Rights: Conflict Minerals and Infant
Mortality. Journal of Law and Economics (Vol. 59). University of Chicago. 1288 Stoop N, Verpoorten M, van der Windt P (2018) More legislation, more violence? The impact of Dodd-Frank in the DRC. PLoS ONE 13(8): e0201783. https://doi.org/10.1371/journal.pone.0201783 1289 Kimberley Process Official Website.Last accessed May 31st 2019. Accessed at https://www.kimberleyprocess.com/en/what-
kp 1290 Ibid. 1291 UNCTAD. Extractive Industries: Optimizing value Retention in Host Countries. (2012) Accessed at
https://unctad.org/en/PublicationsLibrary/suc2012d1_en.pdf
355
However, and despite the creation of these schemes, literature reflects that the reach of
sector-specific due diligence requirements via certification schemes fail to mitigate
human rights abuses when they stem from publicly-owned companies. According to
Gomes dos Santos, the scope of the Kimberley Process Certification Scheme (KPCS)
does not extend to protect from violations committed by the member states themselves
who are financed by the industry.1292 Drawing on Zimbabwe as a case study, the author
demonstrates that while the KPCS has been implemented with the intention of protecting
rights-holders, the control imposed by the scheme (need to apply for permits and pay
the required fee) continued to finance the national government accused of human rights
abuses, while likewise driving the diamond trade further onto the illegal market. The lack
of oversight caused by increased transactions under the illegal market incentivized the
use of illegal production methods, trespassing on protected land, ignorance of
environmental protection standards, and violent crimes including robbery. Similar to the
effects of the Dodd-Frank Act on the livelihoods of legitimately practicing traders, the
KPCS also caused those formally employed in the diamond production chain to decrease
from almost 4,000 to about 650 in 2009.1293
Mandatory Due Diligence Relating to Conflict Minerals
In regard to sector-specific mandatory due diligence of conflict minerals, the German
Watch study referred to above considers the US Dodd-Frank Act (1502) and the EU
regulation on responsible mineral sourcing as the most far-reaching.1294 However, they
are both relatively new frameworks and have significant shortcomings. In terms of the
US Dodd-Frank Act, only companies listed on the New York Stock Exchange are required
to ensure that minerals sourced only from the Great Lakes region do not finance
conflicts. Those that bring in Internet Technology (IT)-products via the European market
are not subject to any checks and are not required to conduct due diligence.
In contrast, the EU regulation on responsible mineral sourcing applies to European
smelters and importers of primary materials. Importers must allow external due
diligence to be conducted by union importers. However, these efforts to enact industry-
specific certification and due diligence schemes can only protect rights-holders down the
supply chain if the requirements are enforced across borders.
In regards to cross-border effects, the literature on effects of due diligence on host
country state-governance capacity is sparse. A 2017 study on the link between
multinational companies and the Congolese presidency notes that while the Congolese
government voiced support for the Dodd-Frank Act, donors continued to hold
reservations regarding government behaviour. However, despite such reservations, they
continued to operate in Congo on the basis that it was a special case for the need to
safeguard international investment in a wider sense (Marriage, 2017). A further study
assessed the effects of two forms of U.S. due diligence (voluntary and mandatory) on
foreign host country governance. In regards to mandatory due diligence, the study finds
that the Dodd-Frank Act is less effective than voluntary guidelines in shifting governance
capacity of the host country as domestic companies more prominently change behavior
1292 Gomes dos Santos E. (2015). The Kimberley Process Certification System – KPCS and Diamond Production Changes in Selected African Countries and Brazil. Geosciences, 68(3), pp. 279-285. 1293 Kimberley Process Official Website.Last accessed May 31st 2019. Accessed at https://www.kimberleyprocess.com/en/what-
kp 1294 Sydow J., Reichwein A. (2018). Governance of Mineral Supply Chains of Electronic Devices: Discussion of Mandatory and
Voluntary Approaches in Regard to Coverage, Transparency and Credibility. Germanwatch e.V.
356
when exposed to voluntary guidelines in comparison. The study suggests that bottom-
up approaches may be more effective or more easily accepted than state laws enacted
by a foreign/national government in a top-down approach (Tsai & Wu, 2018).
Table 8.14: HR Scope of Mandatory Due Diligence Regulation
Conflict Minerals
EU
R
eg
ula
tio
n
on
Resp
on
sib
le
Min
eral
So
urcin
g
Do
dd
Fran
k 1
50
2
In
tern
ati
on
al
Co
nfe
ren
ce
on
th
e
Great
Lake
s
Reg
ion
al
Certi
ficati
on
Healt
h
in
Min
es
ILO
Co
nven
tio
n
Min
am
ata
C
on
ven
tio
n
on
Mercu
ry
ILO
In
dig
en
ou
s
an
d
Trib
al
Peo
ple
Co
nven
tio
n 1
69
Forced Labour
Human Trafficking
Child Labour
Violence by State or Private
Forces
Rape and Forced Prostitution
Financing of Armed Groups
Workers’ Rights – Health and
Safety
Workers’ Rights – Fair Payment
Workers’ Rights – Health
Insurance for Occupational
Injuries
Livelihood of local population
Mining by locals
Cultural Rights
Forced Resettlement
Compensation for Resettlement
The report likewise noted various pieces of legislation that have the demonstrated
capacity to bridge the obvious gaps, if appropriately enforced: the EU Non-Financial
Reporting Directive, the French Duty of Vigilance Law, the UK Modern Slavery Act, and
the California Transparency in Supply Chains Act. However, it is noted that apart from
the French law these examples contain reporting requirements without enforcement of
substantive due diligence standards.
1.4 Environmental Impacts
Businesses carry out their environmental due diligence processes to ensure that their
company complies with environmental protection regulations both to protect the
environment and to protect the health and safety of workers and communities.
357
Companies carry out this due diligence to ensure that the company’s operations as well
as its subcontractors’ are in line with the law and with internal corporate guidelines vis-
à-vis the environment. Even beyond existing environmental and health risk regulations,
environmental due diligence is used to understand potential risks and potential
obligations that may derive from the businesses’ actions to prevent potential future
liability derived from their operations.
However, drawing again on the distinction highlighted by Bonnitcha and McCorquodale
above, the corporate use of the phrase “due diligence” for compliance with laws does not
mean that these laws require due diligence as a standard of care in the way envisioned
by the French Duty of Vigilance Law.1295 Indeed, as set out elsewhere in this study, the
French law currently forms the primary existing example of a law which imposes due
diligence as a legal standard of care for companies’ environmental impacts. However, in
the absence of meaningful information about the implementation impacts of this new
law, this study again focuses on laws which have certain comparative features, whilst
acknowledging their differences.
Due diligence has traditionally involved risk prevention and management, especially to
ensure that new acquisitions would not bring along potential risks to the company.
However, due diligence has evolved to encompass the company’s environmental
footprint and its operational effect on surrounding populations.1296 Along these lines,
regulations such as Directive 2011/92/EU and Directive 2001/42/EC, have started
requiring for companies to carry out environmental impact assessments (EIAs),
sustainability impact assessments (SIAs) and, more recently, human rights impact
assessments (HRIAs).
This evolution and the insertion of human rights due diligence, beyond the requirements
for business of HRIAs as a onetime activity, have environmental implications. Firstly,
because the right to a healthy environment is recognized as a human right, and secondly
because the enjoyment of many other human rights requires a healthy environment.
Examples of human rights which are interrelated with the environment include the right
to health, the right to life, the right to food, the right to safe working conditions, the
right to water, and so forth.1297 Many human rights instruments and national
constitutions include the right to a healthy environment, and acknowledge that a safe,
healthy and sustainable environment is integral to the full enjoyment of a wide range of
human rights, and that without a healthy environment, we would not be able to achieve
minimum standards of human dignity.1298 Building on this recognition of the interrelated
relationship between human rights and the environment, the UN Human Rights Council
established a mandate on human rights and the environment in 2012. This mandate has
been further extended in 20181299, for the Special Rapporteur to continue “helping to
clarify the relationship between human rights and the environment”.1300 Countries such
1295 Jonathan Bonnitcha, Robert McCorquodale, The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and
Human Rights, European Journal of International Law, Volume 28, Issue 3, August 2017, Pages 899–919. Retrieved from:
https://doi.org/10.1093/ejil/chx042 1296 Geordan Graetz & Daniel M. Franks (2013). Incorporating human rights into the corporate domain: due diligence, impact
assessment and integrated risk management, Impact Assessment and Project Appraisal, 31:2,97-106, DOI:
10.1080/14615517.2013.771006 1297 Article 25 of the 1948 Universal Declaration of Human Rights 1298 OHCHR, 2019. Accessed at
https://www.ohchr.org/EN/Issues/Environment/SREnvironment/Pages/SRenvironmentIndex.aspx 1299 A/HRC/RES/37/8. Accessed at https://documents-dds-
ny.un.org/doc/UNDOC/GEN/G18/099/17/PDF/G1809917.pdf?OpenElement 1300 A/HRC/RES/37/8 page 3. Accessed at https://documents-dds-
ny.un.org/doc/UNDOC/GEN/G18/099/17/PDF/G1809917.pdf?OpenElement
358
as France and the Netherlands have introduced more general due diligence regulations
that include an environmental dimension.
As can be seen from the Market Practice section, current due diligence practices include
aspects of the environment such as air pollution, greenhouse gas emissions, biodiversity
and climate change. Nevertheless, in the area of international investment arbitration, the
process to introduce regulations and enact new policies that take into account the
relationship between human rights and environmental protection is met with resistance
from businesses and even some governments. An increasing amount of disputes are
being brought to international arbitration by investors and businesses that see changes
in policy to increase environmental (and by implication human rights) protection as a
violation of the conditions under which they agreed to develop their businesses and as a
breach of the investment treaties protecting them. Companies argue, amongst other
things, that these regulations hamper their pre-established operations or increase their
operating costs in an unprecedented manner. On the other hand, governments are
concerned about the environmental costs and the proper protection of their citizens’
basic human rights. As an example of the magnitude of these costs, it has been
estimated that governments have paid corporations nearly US $400 million in the
settlement of disputes under North American Free Trade Agreement (NAFTA) concerning
environmental and health related laws.1301 It has also been estimated that Canada has
paid US $200 million1302 to US investors in the settlement of arbitration disputes mostly
related to environmental protection or resource management that had negatively
affected the corporations’ profits.
Moreover, businesses are attempting to sue governments, or threatening to do so, even
before they have an operating mine on site1303 for damages to their investment that
derive proposals to prioritize the protection of human rights and the environment, which
would impose new duties to investors in these areas. For instance, in the case of
Carmichael Coal (also known as Adani) a coal mine faced strong backlash from society
and environmental activists in Australia even before the operations started. The
company recently released a statement by which it threatened with a multi-billion dollar
lawsuit if the government agreed to the citizens’ petitions to stop the mine.1304
Furthermore, a recently released report by Mining Watch Canada that studied 38 cases
filed by mining corporations against Latin American Governments via the investor-state
dispute settlement (ISDS) system noticed that a “majority of these cases were brought
by exploration companies that have no operating mine, or no other mining project at all,
(…) in several cases, (Infinito Gold v. Costa Rica, Eco Oro Minerals v. Colombia, and
TriMetals Mining - formerly South American Silver- v. Bolivia), exploration companies
were being backed by third party funders who would profit from the case if the
arbitration panel finds in favor of the company”.1305 This allows companies to try to sue
the governments without risking losses if they do not win the case, while governments
1301 Bernstein, Jared. “Trump’s preliminary deal with Mexico is better for workers on both sides of the border than prior trade
deals”. The Washington Post. August 28 2018. Accessed at:
https://www.washingtonpost.com/news/posteverything/wp/2018/08/28/trumps-preliminary-deal-with-mexico-is-better-for-
workers-on-both-sides-of-the-border-than-prior-trade-deals/?utm_term=.4179c0b45010 1302 This amount does not include legal fees that have been estimated to total nearly $65 million for these cases. 1303 Moore, J. and Perez Rocha, M. Mining Companies Gambling with Latin American Lives and Sovereignty through
Supranational Arbitration. Mining Watch Canada, Institute for Policy Studies and CIEL. 2019. Accessed at: https://miningwatch.ca/sites/default/files/isds_report_final_.pdf 1304 Owens, Jared. Adani to seek billions if mine blocked. March 4th 2019. The Australian. Accessed at
https://www.theaustralian.com.au/nation/politics/adani-to-seek-billions-if-mine-blocked/news-
story/2a60e77c8214efe4e4fede033e47ea14 1305 Moore, J. and Perez Rocha, M. Extraction Casino. Mining companies Gambling with Latin American Lives and Sovereignty
through supranational aribrtration. Mining Watch, Institute for Policy Studies and CIEL. (2019). Page 3.
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have to spend millions of dollars in their defense that will not be recovered even if the
government wins the case.
Originally these controversies and concerns were also expressed in the EU policy-making
process on environmental due diligence. The process leading to the enactment of the EU
Timber Regulation was met with scepticism by a coalition of forest-rich countries
(Austria, Germany, Finland and Sweden) that initially opposed the insertion of such
environmental safeguards.1306 This coalition encountered a coalition of countries, mostly
timber import-dependent (the UK, the Netherlands and Denmark) that supported the
regulation. After two years of political negotiations, there were expressions of a
widespread perception that the policy would not mean a revolution but rather a political
signal1307 to point out that illegal logging is forbidden.1308 The regulation continued to
introduce due diligence mechanisms which were subsequently complemented by the EU
Non-Financial Reporting Directive (2014/95/EU) and the EU Conflict Minerals Regulation
(Regulation 2017/821). The former requires large companies to report on their impacts
and risks regarding human rights and environment, amongst other matters. The latter
applies to the tin, tantalum, tungsten and gold industries, and establishes the obligation
for EU importers to carryout due diligence as from 2021.
Furthermore, the 2016 Council Conclusions on Business and Human Rights called for the
launch of an EU Action Plan on Responsible Business Conduct. Political groups1309 are
calling for the implementation of the UNGPs across the EU policy framework. In addition,
some Member States, such as France, are taking the lead by enacting laws that impose
general human rights and environmental due diligence requirements. According to the
2017 French Duty of Vigilance Law, the company must draft a vigilance plan that
“includes due diligence measures to identify risks and prevent serious violations of
human rights and fundamental freedoms, human health and safety, and the
environment (…)”.1310 (See Country Report on France in Regulatory Review above.) Civil
society organisations and claimants which are of the view that a company’ vigilance plan
does not adequately address adverse impacts to human rights and the environment may
formally ask for the companies to explain the shortcomings or approach a court.
As is evidenced in the Regulatory Review of this study, calls or proposals for similar laws
which impose mandatory due diligence as a legal standard of care for human rights and
environmental harms are currently in varied stages of being considered in Germany,
Finland, the UK and other EU Member States, as well as in Switzerland.
1.4.1 Pre-Implementation Impact Assessment Review
1306 Sotirov et al. The emergence of the European Union Timber Regulation: How Baptists, Bootleggers, devil shifting and moral legitimacy drive change in the environmental governance of global tinder trade. Forest Policy and Economics. Volume 81,
August 2017, Page 69-81. Accessed at https://doi.org/10.1016/j.forpol.2017.05.001 1307 Quote from Sotirov. Et al. (2017), page 76. “When a perception developed that the EUTR would not mean a revolution and
the prohibition would be more of a symbolic policy for the forest sector, sending out a political signal to the public that
policymakers care about the issue (C1, C2), political support of the EUTR was reached in the Council. The normative power of
environ-mental and economic arguments convinced most Member States to vote in favour once it became unlikely that the
EUTR could be stopped: “To simply forbid it [illegal logging] - yes, this is charming, I have to admit this. And you can nicely
sell this” 1308 Sotirov et al. The emergence of the European Union Timber Regulation: How Baptists, Bootleggers, devil shifting and moral legitimacy drive change in the environmental governance of global tinder trade. Forest Policy and Economics. Volume 81,
August 2017, Page 75-76. Accessed at https://doi.org/10.1016/j.forpol.2017.05.001 1309 The MEPS for responsible business conduct has created a Shadow plan Accessed at
https://responsiblebusinessconduct.eu/wp/ 1310PROPOSITION DE LOI relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre.
http://www.assemblee-nationale.fr/14/ta/ta0924.asp
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The table below reviews environmental impacts found in impact assessments carried out
prior to the implementation of relevant EU regulations. A common feature across these
evaluations is that the quantification of the effects on the environment is addressed in
general terms, particularly in the case of illegal extraction and trade activities, which are
difficult to trace. Environmental impacts often include indirect positive effects derived
from changes in companies’ conducts due to reputational concerns, and from changes in
market flows – i.e. re-channeling demand and supply flows from and to compliant
agents.
The review commences with the European Commission’s Impact Assessment on
Additional Options to Combat Illegal Logging (2008) mentioned above. As detailed
above, EU policy regarding illegal logging was set out in the Forest Law Enforcement,
Governance and Trade (FLEGT) Action Plan which assessed five additional measures to
the original VPA approach including 1) expansion of the FLEGT VPA approach; 2) Further
development of voluntary measures by the private sector; 3) Border measures to
prevent the importation of illegally harvested timber; 4A) Legislation which prohibits the
trading and possession of timber and timber products harvested in breach of the laws of
the country of origin; 4B) Legislation which requires that only legally harvested timber
and timber products be placed on the market. Under all policy options, the volume of
illegal logging was expected to reduce and as such also decrease destructive practices
such as high-grading, soil and stand damage; depletion of the forest resource base and
threatening remaining intact sites; deforestation, erosion sedimentation and variations in
hydrological regimes that lead to degradation of land and water resources; loss of forest
cover due to informal roads constructed by illegal loggers; and recurrent forest fires.
Under Option 1, however, the licensing scheme would expand which is expected to
simultaneously increase harvesting volumes—putting more pressure on the environment,
albeit this change would be moderate. This is likewise applicable to Option 2 where
destructive practices are expected to decrease on the assumption that the private sector
schemes reduce illegal logging and increase legal supply. Under Policy Option 3, which
proposes border measures to prevent the importation of illegally harvested timber,
illegal logging volumes are also expected to decrease among those countries with high or
moderate risk. The trade analysis suggests that there would be a slight decline in the
overall timber price leading to an increase in the profitability of other land uses – i.e.
increases in forest conversion. Expected impacts under policy options 4 – 5 can all
expect decreases in detrimental environmental practices, where in policy option 4,
mitigation impacts will be most felt domestically among countries where illegal logging
already occurs, and options 4B and 5 would expect explicit improvements in adherence
to environmental regulations.
The table follows by reviewing the environmental impacts of the EU Commission Impact
Assessment of EU NFRD Proposal (2013). The EU NFRD was proposed in the frame that
disclosure requirements had not yet covered aspects of significance regarding
environmental sustainability. A key motivation for the EU NFRD proposal was the
longstanding transparency issues in corporate responsibility towards the environment.
The Impact Assessment reviewed five possible policy options including 1) voluntary
annual statements; 2) mandatory detailed, stand-alone non-financial reporting; 3) non-
financial report on a “report or explain” basis; 4) voluntary reporting; 5) mandatory EU
standard. Under both policy options 1 and 2a, which are the assessments preferred
options, environmental awareness is expected to increase via improved transparency
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and better quality of information on companies’ environmental performance. This would
have an indirect positive environmental impact by increasing peer pressure and raising
reputational costs for misbehaviour, which would lead to improvements on businesses’
conduct.
Thereafter, we investigate the EU Assessment of Due Diligence Compliance Cost, Benefit
and Related Effects on Selected Operators in Relation to the Responsible Sourcing of
Selected Minerals (2014), for the relevant environmental impacts of six policy options
regulating such activity including 1) Standalone EU Communication; 2) a “soft-law”
approach; 3) Voluntary regulation establishing obligations under an “EU responsible
importer” certification based on the OECD Guidance; 4) Mandatory regulation
establishing obligations under an “EU responsible importer” certification based on the
OECD Guidance; 5) a directive establishing obligations for EU-listed companies based on
the OECD Guidance; and 6) an import ban when EU importers of ores fail to demonstrate
compliance with the OECD Guidance. Under the current scenario, there is inexistent
support for the development of sustainable economic models relying on natural resource
wealth and transparent extractive sectors. While there are no specific impacts on the
environment under options 1 or 2, option 3 is expected to have indirect positive
environmental impacts based on reputation as this option would encourage demand for
ethically and legitimately sourced minerals, leading to formalised mining sectors, more
sustainable development and environmental protection. However, similarly to the
impacts on human rights outlined above, policy options 4 and 5 risk being ineffective as
companies may seek the easiest, least risky and burdensome way of complying
(avoiding sourcing from conflict-affected regions). This could trigger negative impacts on
the environment as mineral flows could be diverted towards companies with lower
environmental standards and norms. Finally, policy option 6 is expected to deliver
indirect positive effects through increased government interventions to ensure that due
diligence on environmental impacts is exercised.
The EU Impact Assessment of Directive 2008/99/EC on the protection of the
environment through criminal law, which lays down a list of environmental offences that
must be considered criminal offences by all Member States if committed intentionally or
with serious negligence, then reviews three policy options, with the first being no action
at the EC level. The second policy option consists of encouragement for cooperation
between Member States, and the third explored option regards minimum regulatory
standards. While the first option is not foreseen to have negative or positive impacts,
option 2 and 3 are expected to benefit efforts for environmental protection due to
increased awareness amongst public authorities, investigators, prosecutors and judges,
as well as citizens. While specifically under option 2, judges may make better use of the
sanctions available under national legislations, policy option 3 goes a step further and
increases the ability to harmonize sanction levels, offence definitions, and scope of
liability across member states.
Lastly, we sought to investigate the results of the pre-implementation EU Impact
Assessment of the Seveso III Directive for any environmentally relevant impacts. While
the directive investigates six policy options, there was no detailed assessment of
environmental impacts available.
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Table 8.15. Impact Assessments carried out prior to the implementation of regulation with potential environmental impacts
Pre-implementation Impact Assessments Environmental Impacts
EU Commission Impact Assessment on Additional Options to Combat Illegal Logging (2008)1311,1312
Baseline scenario
The VPA licensing scheme would reduce the volume of illegal logging, avoiding destructive practices
such as:
high-grading, soil and stand damage;
depletion of the forest resource base and threatening remaining intact sites;
deforestation, erosion sedimentation and variations in hydrological regimes that lead to
degradation of land and water resources;
loss of forest cover due to informal roads constructed by illegal loggers;
and recurrent forest fires.
Option 1 – Expansion of the FLEGT VPA approach
As in the baseline scenario, destructive practices linked to illegal logging would be reduced. With the
expansion of the licensing scheme, the harvesting volumes would increase and put more pressure on
the environment, however, this change would be moderate.
Option 2 – Voluntary measures by the private sector further
developed
The assessment for the baseline scenario applies if the private sector schemes reduce illegal logging
and increase legal supply.
Option 3 – Border measures to prevent the importation of
illegally harvested timber
The assessment for the baseline scenario applies to all countries with high or moderate risk of illegal
logging. The trade analysis suggests that there would be a slight decline in the overall timber price
leading to an increase in the profitability of other land uses – i.e. increases in forest conversion.
Option 4A – Legislation which prohibits the trading and
possession of timber and timber products harvested in
breach of the laws of the country of origin
The assessment for the baseline scenario concerning overall environmental impact applies. The
positive impacts of eliminating illegal logging extend to those EU Member States where illegal
logging occurs.
Option 4B – Legislation which requires that only legally The assessment for the baseline scenario concerning overall environmental impact applies; there
1311 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL determining the obligations of operators who
make timber and timber products available on the Market. IMPACT ASSESSMENT Report on additional options to combat illegal logging. Available at:
https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf 1312 Indufor (2008). Assessment of the impact of potential further measures to prevent the importation or placing on the market of illegally harvested timber or products derived from such timber. Final Report. [online]
Helsinki, Finland: Indufor in association with European Forest Institute (EFI). Available at: https://ec.europa.eu/environment/forests/pdf/ia_report.pdf [Accessed 10 Sep. 2019].
363
harvested timber and timber products to be placed on
the market
would also be an improvement in adherence to environmental regulations.
Option 5 – Legislation requiring companies placing timber and
timber products on the market to exercise due diligence
in ascertaining that the products are legal
Similar impacts to Option 4B.
EU Commission Impact Assessment on EU NFRD Proposal (2013)1313
Option 0 – No policy change No negative effects but also not beneficial impact.
Option 1 – Requiring a statement in the Annual Report
More transparency;
better quality of information on companies’ environmental performance;
increase in environmental awareness;
increase in reputational costs for misbehaviour
Option 2a – Requiring a detailed, stand-alone non-financial
report on a mandatory basis Similar impacts to Option 1.
Option 2b – Requiring a detailed non-financial report on a
“report or explain” basis (companies are allowed to explain why
they have not reported). The report only provides a preliminary assessment of environmental impacts for the preferred
options: Option 1 and Option 2a. Option 2c – Voluntary reporting
Option 3 – Setting up a mandatory EU standard
EU Conflict Minerals – Assessment of Due Diligence Compliance Cost, Benefit and Related Effects on Selected Operators in Relation to the Responsible
Sourcing of Selected Minerals (2014)1314
1313 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives
78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52013SC0127 1314 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due
diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. PART 1 (Impact Assessment). Available at: https://eur-
lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-01aa75ed71a1.0001.01/DOC_1&format=PDF
364
Baseline scenario Inexistent support for the development of sustainable economic models relying on natural resource
wealth and transparent extractive sectors.
Option 1 – Standalone EU Communication This option does not create any specific impact on the environment.
Option 2 – “Soft-law” approach Similar impacts to Option 1.
Option 3 – Regulation establishing obligations under an “EU
responsible importer” certification based on the OECD Guidance
(Voluntary)
Indirect benefits based on reputation. This option would encourage demand for ethically and
legitimately sourced minerals, leading to formalised mining sectors, more sustainable development
and environment, and benefits for local communities.
Option 4 – Regulation establishing obligations under an “EU
responsible importer” certification based on the OECD Guidance
(Mandatory)
Companies may seek the easiest, least risky and burdensome way of complying (avoiding sourcing
from conflict-affected regions). This could trigger negative impacts on the environment as mineral
flows could be diverted towards companies with lower environmental standards and norms.
Option 5 – Directive establishing obligations for EU-listed
companies based on the OECD Guidance Similar impacts to Option 5.
Option 6 – Prohibition of imports when EU importers of ores fail
to demonstrate compliance with the OECD Guidance (Import
ban)
Indirect positive effects through increased government interventions to ensure that due diligence is
exercised.
EU Impact Assessment of Directive 2008/99/EC on the protection of the environment through criminal law1315
Option 1 – No action on EC level No negative effects but also not beneficial impact.
Option 2 – Encourage cooperation between Member States
Positive impact on the protection of the environment due to an increased awareness amongst public
authorities, investigators, prosecutors and judges, as well as citizens. For example, judges may
make better use of the sanctions available under their national legislations.
Option 3 – Set minimum regulatory standards Positive impact on the protection of the environment due to the following:
High level of public awareness and political agreement.
1315 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of the environment through
criminal law. IMPACT ASSESSMENT. Available at: https://ec.europa.eu/smart-regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf [Accessed 11 Sep. 2019].
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Increased sanction levels, broader definitions of offences, and extended scopes of liability (e.g. the
liability of the legal person does not rule out personal liability).
EU Impact Assessment of Directive 2012/18/EU – Seveso III Directive1316
Policy Issue 1 – Alignment of Annex I to CLP
Environmental impacts were not assessed in detail.
Policy Issue 2 – Other technical amendments to Annex I
Policy Issue 3 – Procedures for adapting Annex I in the future
Policy Issue 4 – Information to the public and information
management systems including reporting
Policy Issue 5 – Land-use planning
Policy Issue 6 – Clarifications to facilitate effective implementation
National Regulations
French Duty of Vigilance Law
No IA available.
Dutch Child Labour Due Diligence Law
Italian Decree on Due Diligence
Spanish Law on Environment and Human Rights
Swiss Advanced Legislative Proposal
1316 See COMMISSION STAFF WORLING PAPER. IMPACT ASSESSMENT Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the control of major-accident
hazards involving dangerous substances. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010SC1590&from=EN [Accessed 11 Sep. 2019].
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1.4.2 Post-Implementation Impact Assessment Review
Regarding post-implementation studies, the following table presents the main
environment-related conclusions of the Environmental Liability Directive (ELD) and the
EU Timber Regulation. As mentioned above, while the ELD does not involve reporting or
due diligence requirements, its evaluation provides relevant criteria to consider during
the refinement and designed of policy options. Moreover, the EUTR implementation
evaluation confirmed the relevance of these criteria to yield positive environmental
results. Nevertheless, the report states that the effectiveness of the EUTR to reduce
damage caused by illegal activity is hard to quantify.
The European Commission’s Report on the Implementation of the Environmental Liability
Directive (2016), which establishes a framework based on the polluter pays principle to
prevent and remedy environmental damage, is weakened by the fact that it is not
coordinated or harmonised with the Habitats Directive. This allows for ambiguity and a
fragmented interpretation of concepts such as significant biodiversity damage or
preventive and remedial measures across Member States. As information is scattered
and its accuracy is not clearly determined, assessing baseline conditions, determining
the extent of potential impacts, and establishing causal links is very difficult. However, a
key added value of the ELD is the possibility to attribute strict liability to an operator for
damage to biodiversity, although, the distinction between strict liability and fault-based
liability exists across different types of activities that are harmful for biodiversity. The
result of this is that the procedures to prove causal links in the case of fault-base liability
are exacerbated, and thus making the implementation of the ELD more complex.
In regards to the EU Timber Regulation, the 2016 evaluation indicates that the EUTR
demonstrated itself to be highly relevant for tackling illegal logging and related trade by
changing market behaviour patterns and freeing supply chains from illegally harvested
timber. It is recognised as an important instrument to halt deforestation and forest
degradation, enhance and maintain biodiversity, and address global climate change.
Additionally, the report highlights the EUTR’s added value of establishing uniform rules,
and its coherence with other relevant policy instruments (VPAs, FLEGT AP, and the EU
Wildlife Trade Regulations).
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Table 8.16. Post-implementation Impact Assessments
Post-Implementation Impact Assessments/Studies Relevant findings
EU Directive 2004/35/EC – Environmental Liability Directive1317,1318
The ELD aims to establish “a framework for the prevention and remedying of
environmental damage through a liability based on the ‘polluter-pays principle’ in
order to ensure that biodiversity is restored or maintained at Favourable Conservation
Status, and thus halting biodiversity loss in the EU.” It requires that “operators whose
activity has caused biodiversity damage or imminent threat of such damage, to be
held liable.”
The ELD is not coordinated or harmonised with the Habitats Directive, leading to various interpretations of concepts such as
significant biodiversity damage or preventive and remedial measures across Member States.
Information is scattered and its accuracy is not clearly determined, thus making difficult to assess baseline conditions and
determine the extent of (potential) damages; establishing causal links and monitoring obligations.
A key added value of the ELD is the possibility to attribute strict liability to an operator for damage to biodiversity. However,
the distinction between strict liability and fault based liability exists across different types of activities that are harmful for
biodiversity. The result of this is that the procedures to prove causal links in the case of fault base liability are exacerbated,
and thus making the implementation of the ELD more complex.
EU Timber Regulation Implementation Reports1319,1320
The EUTR “is an EU legislative instrument to address the global problem of illegal
logging by acting on the side of the demand of timber and timber products.” It is part
of the Forest Law Enforcement Governance and Trade Action Plan (FLEGT AP), which
was adopted in 2003 with the aim of improving “the supply of legal timber and to
increase the demand for timber sourced from responsibly managed forests”. As
indicated above, the EUTR have three key obligations: (1) The placing on the market
of illegally harvested timber or timber products is prohibited; (2) Operators who are
placing timber and timber products on the EU market for the first time are required to
exercise due diligence (risk management); (3) Traders of timber and timber products
already placed on the EU market are required to keep record of their suppliers and
customers (obligation of traceability).
The 2016 evaluation indicates that the EUTR demonstrated to be highly relevant for tackling illegal logging and related trade by changing market behaviour patterns and freeing supply chains from illegally harvested timber. It is recognised as an important
instrument to halt deforestation and forest degradation, enhance and maintain biodiversity, and address global climate change. Additionally, the report highlights the EUTR’s added value of establishing uniform rules, and its coherence with other relevant policy instruments (VPAs, FLEGT AP, and the EU Wildlife Trade Regulations).
1317 Milieu Ltd., IUCN (2014). Experience gained in the application of ELD biodiversity damage. Final report for the European Commission, DG Environment. [online] Brussels. Available at:
https://ec.europa.eu/environment/legal/liability/pdf/Milieu%20report%20-%20ELD%20Biodiversity%20Damage.pdf [Accessed 11 Sep. 2019]. 1318 The report describes the implementation challenges of the ELD based on the analysis of 10 EU Member States environmental liability regimes. There are no pre-implementation impact assessments available for
this regulation. 1319 See COMMISSION STAFF WORKING DOCUMENT Evaluation of Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place
timber and timber products on the market (the EU Timber Regulation). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52016SC0034&from=EN 1320 See REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Regulation (EU) No 995/2010 of the European Parliament and the Council of 20 October 2010 laying down the obligations
of operators who place timber and timber products on the market (the EU Timber Regulation). Biennial report for the period March 2015 – February 2017. Available at: https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52018DC0668&from=EN
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1.4.3 Benefits and Challenges of Environmental Due Diligence
Much of the literature has been developed to assess the benefits for private companies
of implementing environmental safeguards. Such benefits are seen to accrue from
decreasing the risks associated with lack of compliance, improving the company’s image
towards the general public, and even improving the company’s performance. However,
the literature review shows a lack of studies which aim to systematically quantify the
benefits derived from environmental safeguards. The very few studies found already rely
on the assumption that environmental safeguards carry positive benefits for the
environment.1321 Others indirectly state the consequences that would derive from the
absence of environmental safeguards, therefore implicitly stating that these benefits
(such as biodiversity protection) will happen only if environmental due diligence is set in
place.1322 Finally, another set of reports and studies makes normative statements on the
benefits derived from the establishment of environmental safeguards.1323 Only a limited
number of studies made an attempt to quantify the benefits derived from these
safeguards in a more systematic manner, such as the ADBs “Real-Time Evaluation of
ADB’s Safeguard Implementation Experience Based on Selected Case Studies”, that
made an economic quantification of the benefits directly derived from their program.
1321 Annual Report on the OECD Guidelines for Multinational Enterprises 2014. 1322 Moving towards a Common Approach to Environmental and Social Standards for UN Programming. UN Environment
Management Group. Moving towards a Common Approach to Environmental and Social Standards for UN Programming (Public
Draft, 2018) Accessed at https://unemg.org/wp-content/uploads/2018/11/Model_Approach_ES-
Standards_30_October_2018_CONSULTATION.pdf 1323 A Framework for Advancing Environmental and Social Sustainability in the United Nations System. UN
https://sustainabledevelopment.un.org/content/documents/2738sustainabilityfinalweb-.pdf
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Table 8.17: Literature on beneficial environmental impacts
Study Benefits Approach Key findings Sources
Annual Report on the
OECD Guidelines for
Multinational
Enterprises 2014.
Environmental Safeguards benefit the
environment being a tool that civil
society can use to advocate for the
protection of the environment by
requiring for businesses to comply with
certain standards
The reports shows a series of cases in
which environmental safeguards served
to protect the environment
There are no key findings as it
the report is descriptive
OECD, 20141324
Real-Time Evaluation
of ADB’s Safeguard
Implementation
Experience Based on
Selected Case Studies
Based on the interpretation of changes
in forest and non-forest cover from
2010 to 2015 the environmentally
critical areas adjacent or traversed by
the three roads experienced net
increases in forest cover. Safeguard
measures such as avoidance of new
construction sites, planting of trees
when removal cannot be avoided, and
better protection by forest authorities
against poachers likely contributed to
the larger forest cover. Increased areas
of the elephant habitats in Hurulu and
Tabbowa also raise the potential
number of elephants and other wildlife
that could be supported.
When measuring environmental benefits
the study focused on measuring the
environmental safeguards on elephants
as elephant constitute the country’s
iconic mammal for spiritual and
socioeconomic reasons, however the
study acknowledges that there are
other environmental benefits such as
forest growth.
Within the benefit calculated
to be derived from
environmental safeguards it
was include the “value of
avoided Hurulu elephant road
kill” which was valued in USD
27,011 with safeguards,
versus a USD 61,429 cost if
there were no safeguards
Asian Development
Bank, 20161325
Moving towards a
Common Approach to
Environmental and
Social Standards for
The UNEMG establishes a Model
Approach to Environmental and Social
Standards for UN programming and
includes Biodiversity, Ecosystems and
The study does not directly quantify the
benefits of environmental safeguards on
the environment but it talks about the
consequences in biodiversity loss that
UN Environment,
20181326
1324 OECD (2014), Annual Report on the OECD Guidelines for Multinational Enterprises 2014: Responsible Business Conduct by Sector, OECD Publishing, Paris. Available at: https://doi-
org.gate3.library.lse.ac.uk/10.1787/mne-2014-en 1325 Asian Development Bank (2016). Real-Time Evaluation of ADB’s Safeguard Implementation Experience Based on Selected Case Studies. Available at: https://www.adb.org/sites/default/files/linked-documents/10-Benefits-and-Costs-of-Safeguards.pdf 1326 UN Environment Management Group. Moving towards a Common Approach to Environmental and Social Standards for UN Programming (Public Draft, 2018) https://unemg.org/wp-
content/uploads/2018/11/Model_Approach_ES-Standards_30_October_2018_CONSULTATION.pdf
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UN Programming Sustainable Natural Resource
Management as one of the Thematic
Areas. The document suggests that the
set environmental safeguards avoid and
minimize adverse impacts to terrestrial,
freshwater and marine biodiversity and
ecosystems.
would derive from the absence of these
system of safeguards
A Framework for
Advancing
Environmental and
Social Sustainability in
the United Nations
System
Environmental Protection and Human
Health
In this report it is established that the
Safeguards Working Group changed the
terminology from “environmental and
social safeguards” to “environmental
and social sustainability framework” , as
the latter encompasses safeguards plus
additional measures used in internal
management practices and normative
activities
The report establishes a series
of benefit associated with the
use of a common
environmental and social
sustainability framework which
include “delivering greater
environmental protection and
promotion of human well-
being”
United Nations,
20121327
Environmental and
Social Safewards
System
Environmental and social safeguard
standards provide guidance on how to
identify risks
and impacts, and are designed to help
avoid, mitigate, and manage risks and
impacts
throughout the life of a project, and this
safeguards include “Pollution Prevention
and Resource Efficiency; Biodiversity
Conservation and Sustainable Natural
Resource Management;”
The document is mostly normative and
descriptive in its approach to
environmental safeguards.
Environmental safeguards
have the objective to “To
avoid or minimize adverse
impacts on human health and
the environment by avoiding
or minimizing the production
of wastes and pollution from
project activities.”
UN Habitat, 20161328
1327 UN (2012) A Framework for Advancing Environmental and Social Sustainability in the United Nations System. Available at: https://sustainabledevelopment.un.org/content/documents/2738sustainabilityfinalweb-
.pdf 1328 UN Habitat (2016) Environmental and Social Safewards System. Available at: https://unhabitat.org/un-habitat-environmental-and-social-safeguards-system/
371
Environmental and
Social Safeguards
Policy
The CEB will not knowingly finance
Projects which: Are likely to cause
significant and irreversible negative
environmental and/or adverse social
impacts.
Council of Europe
Development
Bank1329
Concept Brief Country
Approaches to
Safeguards
Safeguards are widely understood to be
measures to protect someone or
something or to prevent something
undesirable; in other words, to do no
harm.
Rather than key findings the UN REDD
programme clarifies the role of
environmental safeguards, stating that
“Safeguards can build confidence and
provide assurance for stakeholders that
mitigation actions in the forest and land
use sectors will not proceed at the
expense of environmental sustainability
and social equity.”
UN-REDD
Programme, 20161330
1329 Council of Europe Development Bank (n. d.). Environmental and Social Safeguards Policy. https://coebank.org/media/documents/Environmental_and_Social_Safeguards_Policy.pdf 1330 UN-REDD Programme (2016). Concept Brief Country Approaches to Safeguards. Available at: https://unredd.net/index.php?option=com_docman&task=doc_download&gid=10177&Itemid=53
372
Despite the benefits mentioned above, studies have remained focused on the challenges that environmental safeguards pose economically and
logistically both for companies and for governments. Little has been said on the current challenges that these safeguards pose for the environment, or
on whether the establishment of these due diligence requirements poses any risks for the environment. The literature has however started to point to
certain challenges in trying to introduce environmental safeguards. Some of the challenges found in the literature refer to the difficulties of ensuring
that environmental due diligence evolves as environmental problems evolve. In this regard, it has been shown the environmental due diligence
provisions of multilateral financial institutions lagged behind when trying to formally include climate change.1331
The rest of the literature focuses more on the challenges that arise when implementing these safeguards, given that what we refer to as the
“environment” usually relates to complex systems that require from complex processes for their protection. As a result, the common challenges that
arise are the lack of capacity to actually carry out these environmental due diligences as initially envisioned.1332 More specifically, challenges such as the
lack of site-specific details in environmental management plans, limited community awareness of project details, or inconsistent environmental
monitoring practices, render the implementation of these safeguards more onerous than initially envisioned. Additional challenges are found in
achieving regulations that do not encourage companies to seek the easier ways to comply, as indicated above in the risks presented in the pre-
implementation evaluation of the mandatory due diligence option of the EU Conflict Minerals. Regarding this potential risk, similar to the findings of the
human rights literature review, past research shows that the law does not restrain companies from moving business components where stricter laws do
not apply or where the costs of complying are lower. Nevertheless, the literature also identifies potential benefits that may counterbalance this negative
effects, such as the development of sustainable business-models1333, which in the long-term may be helpful to improve conditions in the new locations.
Table 8.18: Literature on challenges to existing environmental due diligence
Study Challenges Key findings Sources
Approaching climate
adjusted environmental
due diligence for
multilateral financial
institutions
Although environmental safeguards continue
to play vital roles in bank operations, it
generally remains traditional with minimal
adjustments to formally include climate
change
This study looks into literature on environmental
safeguards for five selected multilateral financial
institutions (MFIs) with the objective of verifying whether
their environmental safeguards have been updated with
climate change elements, and whether they have adopted
specific climate change strategies for their investment
portfolios, and finds that minimal adjustments have been
Kwame Boakye‐
Agyei,20111334
1331 Boakye-Agyei, K. (2011). Approaching climate adjusted environmental due diligence for multilateral financial institutions. International Journal of Climate Change Strategies and Management, 3(3), 264-274.
doi:http://dx.doi.org.gate3.library.lse 1332 Asian Development Bank. RETA 7548: Improving of Environmental Safeguards in Central and West Asia, Georgia Country Report. Accessed at https://www.adb.org/sites/default/files/project-
document/42973/43333-012-tacr-03.pdf 1333 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. Available at SSRN:
https://ssrn.com/abstract=2508281 1334 Kwame Boakye‐Agyei, (2011) "Approaching climate adjusted environmental due diligence for multilateral financial institutions", International Journal of Climate Change Strategies and Management, Vol. 3 Issue: 3,
pp.264-274, https://doi.org/10.1108/17568691111153410
373
made to formally include climate change.
Improving the
Implementation of
Environmental
Safeguards in Central and
West Asia
Insufficient capacity in executing agencies to
prepare, implement, and monitor the
implementation of EMPs.
Amongst other issues this report points out towards the
challenges that arise when trying to implement ambitious
environmental safeguards when the institutional capacity
to do so is limited
Asian Development Bank,
20141335
Assessing the impact of
institutional conditions
upon REDD+
The introduction of complicated systems of
safeguards have all affected the emergence of
‘pure’ REDD+ in Guyana.
The basic theoretical approach of certain natural resources
management programs (such as REDD+) can be hampered
by the imposition of certain environmental safeguards
Laing, Timothy, 20141336
Assessing the impact of
institutional conditions
upon REDD+
Challenges arise when balancing policy
freedom and environmental safeguards.
Finding the right balance between policy freedom and
sufficient safeguards will be crucial for producing JNR that
is both effective and equitable.
Laing, Timothy, 20141337
Safeguard
Implementation: How can
we make it more
meaningful?
Ongoing challenges in coordinating safeguard
responsibilities and monitoring between
institutions and resident missions (lack of
human resources and time to undertake the
required field missions; lack of timely
computer based reporting of safeguard status;
different stages of the safeguard process are
handled by different people; and lack of clarity
in the headquarters–resident mission
handover process, when projects are
delegated to the resident missions).
By looking carefully at safeguard measures that are
exemplary and working effectively in each country, and
examining the context and dynamics that contribute to
their effectiveness, the study tries to understand how to
rectify safeguard measures that are lagging. Amongst
other challenges, the study identifies the following
challenges and shortcomings:
Lack of site-specific details in environmental
management plans
Lack of community awareness of project details
Absence of a role for Local Communities in
Mitigation and Monitoring
Inadequate Implementation of Environmental
Management Plan
Inconsistent Environmental Monitoring.
Asian Development Bank,
20151338.
1335 Asian Development Bank, (2014). RETA 7548: Improving of Environmental Safeguards in Central and West Asia. Georgia Country Report. Accessed at https://www.adb.org/sites/default/files/project-
document/42973/43333-012-tacr-03.pdf 1336 Laing, Timothy (2014) Assessing the impact of institutional conditions upon REDD+. PhD thesis, The London School of Economics and Political Science (LSE).
http://etheses.lse.ac.uk/1024/1/Liang_Assessing_the_impact_of_institutional.pdf 1337 Laing, Timothy (2014) Assessing the impact of institutional conditions upon REDD+. PhD thesis, The London School of Economics and Political Science (LSE).
http://etheses.lse.ac.uk/1024/1/Liang_Assessing_the_impact_of_institutional.pdf 1338 Asian Development Bank, (2015). Safeguard Implementation: How can we make it more meaningful? Accessed at: https://www.aecen.org/sites/default/files/safeguard-implementation_1.pdf
374
1.5 Impact on Public Authorities
Potential impacts on the public administration at the EU level as well as Member State
level and the legal systems have been assessed in previous impact assessments of
similar legislation.
In the EU’s impact assessment on the Non-Financial Reporting Directive1339, the
assessment concludes that the proposed measures will not have any meaningful
consequences for the budget of public authorities in Member States or the EU budget.
Although the Commission will monitor the implementation of the Directives in
cooperation with the Member States throughout the implementation period, it is
expected that the cost for such monitoring activities “would be met from existing
operational budgets, and would not be significant.” The monitoring is expected to include
sample reviews of non-financial statements or reports. A possible cost impact is
expected from data collection activities at EU level, but it is expected to be low as these
activities would use existing structures and instruments. The impact assessment also
considers the possibility to conduct an external study on the implementation of the new
reporting obligation and its effects.
In contrast, the EU’s impact assessment on the Conflict Minerals Regulation1340 (for a
detailed description of the EUTR, please see
Table 8.2) provides detailed cost estimates for the expected administrative costs for the
European Commission and EU Member States (MS). The Conflict Minerals Regulation
requires oversight or enforcement of compliance at Member State level. According to the
impact assessment, some of these estimates are “based on information derived from
experiences under the EU Timber Regulation”1341, which also provides for a degree of
oversight by Member States. An overview of the expected economic costs for each of the
considered legislative options and the related compliance control mechanisms is provided
in Table 8.19 below. Most costs are provided in terms of a “full-time equivalent (FTE)”,
which is equivalent to one employed person working on a full-time schedule.1342
1339 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives 78/660/EEC and 83/349/EEC
as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013SC0127. 1340 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/DOC/?uri=CELEX:52014SC0053&from=EN. 1341 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment), page 50. 1342 The unit is obtained by comparing an employee's average number of hours worked to the average number of hours of a
full-time worker. Eurostat.
375
Table 8.19: Estimated economic cost for EU and MS public authorities from the EU Conflict Minerals Regulation
Regulatory Option Administrative burden
Option 1 – Standalone EU
communication & Option 2 – Soft Law
Promotion via National Contact Points and the Enterprise Europe Network: 0.05 FTE
Financial assistance to the OECD due diligence action: €0.2 million annually over 5 years
Due diligence requirements relating to EC public procurement contracts for IT hardware: additional cost of maximum
7,000 EUR per annum
Drafting of public procurement guidance and further outreach by EC: 1 FTE
Voluntary uptake of due diligence requirements by Member States’ public authorities: 18% of GDP in the EU, which is
420 billion EUR, is used for public procurement to which a maximum of 0.014% cost increase would apply to
procurement contracts in the relevant sectors
Option 3 – Regulation establishing
obligations under an "EU responsible
Importer" certification based on the
OECD Guidance – VOLUNTARY
Taking care of implementing guidance at EC: 1.5 FTEs
One external study on the implementing guidance: 200,000 EUR
Cost of management committee meetings twice a year with Member States: 60,000 EUR
In each of the EU Member States, the scheme would require 1 FTE in designated control bodies for coordination of ex-
post compliance controls and inspections
Option 4 - Regulation establishing
obligations under an "EU responsible
importer" certification based on the
OECD Guidance – MANDATORY
Implementing guidance at EC: 2 FTEs
One external study on the implementing guidance: 200,000 EUR
Cost of management committee meetings four times a year with Member States: 120,000 EUR
In each of the EU Member States, the scheme would require 1.5 FTEs in designated control bodies for coordination of
ex-post compliance controls and inspections
Option 5: Directive establishing
obligations for EU-listed companies
based on the OECD Guidance
Implementing guidance at EC: 2 FTEs
One external study on the implementing guidance: 300,000 EUR
In each of the EU Member States, the scheme would require 2 FTEs in designated control bodies for coordination of
ex-post compliance controls and inspections
Option 6 – Prohibition of imports when
EU importers of ores fail to
demonstrate compliance with the OECD
Guidance – import ban
Negotiation of an international agreement and implementing guidance at EC: 3 FTEs
Outreach towards third countries: 1 FTE
One external study on the implementing guidance: 300,000 EUR
Cost of management committee meetings four times a year with Member States: 120,000 EUR
Cost of handling stockpiled shipped goods that had been refused at entry, but difficult to quantify
In each of the EU Member States, the scheme would require 1.5 FTEs in designated control bodies for coordination of
ex-post compliance controls and inspections, and handling of stockpiled shipped goods that had been refused entry.
376
These two impact assessments are considered to provide the best most useful
assessments of impacts on public administration since they provide a discussion or cost
estimates for activities, which may also be carried out under a new due diligence
regulation.
The EU Impact Assessment on the Timber Regulation1343 also provides estimates for
“regulatory cost”, which is considered to be the cost incurred by government. However,
the activities, for which cost estimates have been provided, are less representative for
possible expected activities under a new regulation than the estimates provided in the
EU Conflict Minerals Impact Assessment. The assessed activities in the related impact
assessment consist, for example, of the checking of samples of timber consignments
which have been imported or originate from EU Member States concerning the legality of
the product (regulatory options 3 and 4B). For regulatory option 4A (Legislation which
prohibits the trading and possession of timber and timber products harvested in breach
of the laws of the country of origin) the impact assessment considers regulatory costs
“related to investigations conducted by the EU police force or other enforcement
authorities”. However, but it does not provide any estimates as it states that “the total
costs for such investigations are difficult to assess and depend on the number of cases
identified and ultimately prosecuted”. For regulatory option 5 (Legislation requiring
companies placing timber on the market to exercise due diligence in ascertaining that
the products are legal), the impact assessment expects regulatory costs from the
“verification whether effective systems have been put in place by operators for
ascertaining that the products are legal” and estimates regulatory costs in the EU of 1
million EUR per year.
For the EU Timber Regulation1344 (EUTR) the latest biennial implementation report1345
was reviewed together with the related background analysis.1346 The background
analysis report provides the more detailed analysis and the biennial implementation
report basically summarises the findings from the background analysis. There are also
"national reports" available on the website, but these contain only the reporting forms
for each MS which they had to fill out. All results from these reporting sheets are
provided also in overview tables in the background analysis report and in a shortened
form in the implementation report.
The background analysis of the 2015-2017 national biennial reports synthesises the
biennial reports on the application of the EUTR by EU Member States and Norway over
the period March 2015 to February 2017. The report provides the results from all
received national reporting forms for different areas such as the existence of national
legislation for the implementation of the EUTR, implementation and enforcement,
cooperation activities on the implementation and enforcement, technical assistance and
capacity development and communication activities by MS as well as the resources
needed by the competent authorities. The report provides a quantitative assessment for
1343 European Commission (n.a.). Staff Working Document. Accompanying document to the Proposal for a Regulation of the
European Parliament and of the Council determining the obligations of operators who make timber and timber products
available on the Market. Impact Assessment. Retrieved from:
https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf 1344 See: https://ec.europa.eu/environment/forests/eutr_report.htm 1345 European Commission (2018). Evaluation of Regulation (EU) No 995/2010 of the European Parliament and of the Council of
20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber
Regulation). Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538746572677&uri=COM:2018:668:FIN. 1346 European Commission (2018). Background analysis of the 2015-2017 national biennial reports on the implementation of
the European Union’s Timber Regulation (Regulation EU No 995/2010). Retrieved from:
https://ec.europa.eu/environment/forests/pdf/WCMC%20EUTR%20analysis%202017.pdf
377
the latter, but the quality and comparability of the reported data by Member States
remains relatively low, which makes it difficult to draw general conclusions from the
provided information.
The implementation and enforcement of the EUTR is to be carried out by “Competent
Authorities” in Member States. According to the background analysis report, all Member
States1347 confirmed that they have designated a Competent Authority to monitor
whether the implementation of the EUTR by operators is in line with the requirements of
the Regulation. The institutional structures, legal powers and status of the designated
authorities vary between Member States, due to their different legal and institutional
frameworks. The Competent Authorities are usually state agencies, ministries or
ministerial departments for forest, environment or agriculture.
Member States also report on their national penalties applicable to infringements of the
EUTR. 13 countries stated that both administrative and criminal penalties could be
imposed, 10 confirmed that administrative penalties were possible, and 2 stated that
criminal penalties could be imposed.
The Competent Authorities in each country are required to put in place a plan for checks
of operators and procedures for checks on Monitoring Organisations to verify their
compliance with the EUTR. The more detailed tasks carried out by the Competent
Authorities are described in the background analysis as follows: Checks on operators and
traders, checks on Monitoring Organisations1348, the provision of guidance as well as
technical and other assistance to operators1349 to facilitate compliance with the EUTR
(particularly relating to the implementation of the due diligence requirement) and
communication to convey information about the EUTR to stakeholders.
Apart from reporting on their tasks, Member States also had to report on their human
and financial resources which they have available for their Competent Authorities to
carry out the required tasks. However, as stated above, the report emphasizes that “the
majority of the figures included in this section are difficult to compare due to the varying
levels of detail provided by countries in their national reports.” In addition, the human
and financial resources of the Competent Authorities varied greatly across the
responding countries.
Concerning human resources, the background analysis report describes that for timber
imported into the EU, available human resources of Competent Authorities ranged from
0.125 full time equivalent (FTE) staff to as many as 10 staff (in the official biennial
implementation report the upper estimation is 8 staff which seems to be the correct
figure). Similarly, for domestic timber, available human resources varied between 0.125
FTE and 20 staff. For both estimates, i.e. for imported as well as domestic timber
estimates, the relatively high number of human resources reported by Italy, Greece,
Denmark and Bulgaria were taken as outliers and removed from the report.1350 In
1347 All 28 EU Member States submitted biennial reports on their implementation of the EU Timber Regulation (EUTR). The
report also includes information on the application of the EUTR in Norway as a member of the European Economic Area (EEA). 1348 There are 13 Monitoring Organisations12 established in the EU, many of which also offering their services in countries
where they do not have an office. The main offices of Monitoring Organisations should be checked by the Competent Authority
of this country every 2 years, and Competent Authorities should also regularly check Monitoring Organisations that do not have their main seat in their country but are offering their services there. 1349 Twenty-three (23) countries provided details of assistance and training provided to operators by government
organisations. The most frequently reported method of assistance was lectures or seminars (10 countries) followed by the
provision of information on the website of the organisation in question (8 countries). 1350 The report states that the “relatively high number of human resources reported by Italy, Greece, Denmark and possibly
others may be based on customs personnel or other supporting staff in general also having been included.”
378
addition, in many countries the core staff are also supported by others, who are not
primarily focused on EUTR implementation and enforcement (e.g. forest inspectors).
In relation to financial resources, some countries have reported extremely limited
budgets for implementation and enforcement of the EUTR (e.g. Belgium), whereas
others (e.g. Germany) reported that they did not have an upper limit.
The detailed information provided by each country is presented in the two overview
tables below. However, it is important to emphasize that these figures relate to reported
current human and financial resources of Competent Authorities rather than the required
financial and human resources.
379
Table 8.20 Human resources available for the implementation and enforcement of the EUTR as reported in the background synthesis
report (FT: full time equivalent staff, PT: part time equivalent staff)
Country Imported timber Domestic timber
Austria 2.5 (2 953.5 working hours) 20 person months
Belgium 0.5 FT 0.5 FT (shared with imported timber, not used in 2016)
Bulgaria 20 20
Croatia 1 1
Cyprus 2 PT (60-70% of time) 22 PT (30-40% of time)
Czech Republic 39 PT 39 PT
Denmark 24 24
Estonia 1 FT*, with assistance as required 11 FT
Finland 1 FT and 2 PT 1 FT and 2 PT
France 6.3 FT 6.3 FT
Germany ~ 10 FT (only CA) several PT for each administrative region (16)*
Greece 45 68
Hungary 8 8
Ireland 4 4
Italy 90 2400
380
Latvia 1 1 FT**
Lithuania 1 FT, with assistance from 11 regional specialists 1 FT
Luxembourg 0.125 0.125
Malta 1 N/A
Netherlands 3 3 (including imported timber)
Norway 1 PT (43% of time) 1 part time (~17%)*
Poland 7 7
Portugal CA: 1 FT*, 1 PT (~65% of time)*; Regional CA:12 PT (10% of time); Azores: 1 FT*, 11
PT (10% of time), 8 forest guards; Madeira: 1 FT*, 2 PT (10% of time) Resources shared for domestic and imported timber
Romania Not specified Not specified
Slovakia Not specified Not specified
Slovenia 2 FT 14 PT
Spain 24 PT in March 2015; 42 PT in February 2017 24 PT in March 2015; 42 PT in February 2017
Sweden ~ 2.2 FT ~ 0.3 FT
United Kingdom 5 FT** Resources shared for domestic and imported timber
*Due to limited levels of detail provided, this information was inferred.
**Core staff also supported by other human resources.
381
The second relevant set of assessments is the 2016 evaluation of the EUTR.1351 In this
evaluation, the public sector costs created for Member States are described, but only in
a qualitative and general form: “The resources allocated by the Member States for
monitoring the application and enforcement of the Regulation depend on the size of the
country and its institutional structure and governance, the characteristics of the forest
sector, including land tenure and traditional management systems, as well as legality
risks involved.”
Furthremore, the evaluation report finds that small countries have lower allocations of
resources than larger ones, but also states that the pattern of government expenditures
includes variations that cannot be explained by the size of the forest sector alone.
Regarding the human resources indicated by the reporting Member States (23 Member
States included this information in their biennial reports), the evaluation report finds that
these range approximately from 1 to 200 persons-month per year.
Regarding the financial resources indicated by the reporting Member States (only 9
Member States provided quantitative information on their financial expenditure), the
evaluation report finds that these vary approximately between EUR 10 000 to EUR 370
000 per year for monitoring the application of the EUTR, including information-sharing
activities and enforcement.
The Seveso III Directive (2012/18/EU)1352 aims at the prevention of major accidents
involving dangerous substances as well as at limiting the consequences of such accidents
for human health and the environment. The Directive requires Member States to ensure
that operators fulfil several obligations, including, for example, producing external
emergency plans for high-risk establishments, deploying land-use planning for the siting
of establishments, making relevant information publicly available, or conducting
inspections. The latest Commission report available on the website, i.e. the Report on
the Application in the Member States of Directive 96/82/EC on the control of major-
accident hazards involving dangerous substances for the period 2009-2011, does not
provide any information on the costs incurred by the competent authorities. The Impact
Assessment1353 of the Seveso III Directive discusses mainly costs for operators, but also
considers some costs for competent authorities. However, some of the costs refer to
changes of an existing Directive (e.g. technical changes to the Annex I) and can
therefore not be applied to the assessment of a completely new regulation. This is the
case for the costs for authorities estimated for policy issues 1 to 3, which refer to
changes of Annex I. These options have a cost impact regarding the scope of the
Directive, meaning that the number of affected companies would change (new
companies would be subject and companies subject to the requirements previously
would fall out of the scope of the requirements). The adjustment costs for authorities are
estimated from around 400,000 EUR (policy issue 1) to 800,000 EUR (policy issue 3) per
year for the competent authorities.
1351 European Commission (2016). Evaluation of Regulation (EU) No 995/2010 of the European Parliament and of the Council of
20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber
Regulation). Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52016SC0034. 1352 For more information, please see: European Commission (2019). Major accident hazards. Available at:
https://ec.europa.eu/environment/seveso/legislation.htm. 1353 See European Commission (2010). COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the
control of major-accident hazards involving dangerous substances. Retrieved from: https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52010SC1590.
382
Under policy issue 4 (Information to the public and information management systems
including reporting), the impact assessment provides estimates for the provision of
different types of information to the public and in different forms as described in the
table below. For policy option 5 (Land-use planning) the Impact Assessment provides
cost estimates for some on-site assessments of establishments by the competent
authorities.
383
Table 8.21 Estimated costs for authorities in the Seveso III Impact Assessment
Regulatory Option Impact on public authorities
Policy issue 4: Information to the public and
information management systems including
reporting
Costs estimates for type of information provided
To make existing information (Annex V) available on existing governmental websites (policy issue 4) it
is estimated that the total one-off costs for authorities would be about 1 million EUR.
For a more comprehensive provision of information (e.g. basic data on establishments and on main
type of major accident scenarios) the Impact Assessment estimates total one-off costs of 2-4 million
EUR with an annual cost of updating the information of about 0.5 million EUR.
If the provided information would be even more comprehensive and also include addition non-
technical summaries of the key documents, the safety report and the external emergency plans to be
made publicly available, the total one-off cost for competent authorities is estimated at the order of
EUR 3 to 4 million (assuming that no such documents are currently produced). The cost for updating
the information every three years is estimated at an average total annual cost of around EUR 2-5
million.
Cost estimates for different types of information management
A system in each Member States which includes a simple website structure and basic tasks such as
uploading relevant documents and information for each establishment is estimated at a total one-off
cost of about 1 million EUR.
A central EU website that can be used to access information in all Member States either through links
to documents directly uploaded on to it or links to Member State websites/databases which would use
existing IT infrastructure and existing databases is estimated to cause total set-up costs of around 0.5
to 1million EUR. The operation and maintenance costs would be about 50,000 to 100,000 EUR per
year.
The cost for a centralised EU database with all information integrated which would require Member
States adapting their existing systems cannot be estimated without a detailed analysis of the system
requirements, but are likely to be very substantial.
Policy issue 5: Land-use planning The cost for competent authorities to make an in-depth site-by-site analysis of the situation to assess
whether or not there are appropriate safety distances and to identify what remedial land-use
measures might be needed is estimated at a total cost of more than EUR 130 million.
384
The EU Environmental Liability Directive (ELD, Directive 2004/35/EC)1354 establishes a
framework based on the polluter pays principle to prevent and remedy environmental
damage. No official impact assessment was found online, but a report on the
implementation of the ELD.1355 The report, however, concludes that it is not possible to
draw sound conclusions on the administrative costs because of the limited information
on administrative costs for authorities. It states that only three Member States (Belgium,
Bulgaria, and Spain) provided precise data on administrative costs for public authorities,
which vary considerably. The reported costs range from EUR 55,000 per year (in the
Flemish Region of Belgium) to annual administrative costs of EUR 135,613 per year in
Bulgaria and EUR 2 million (in some of the autonomous communities of Spain). At a later
stage the report again refers to administrative costs and states that “no comparable
figures exist”. It then provides examples for reported administrative costs from some
Member States as described below. However, as the report states, it is not clear how
these costs are estimated, to what they refer and what they include and they do not
seem to be comparable:
Belgium indicated that they have not seen additional administrative costs at
federal State level and Hungary communicated that no additional administrative
costs were incurred by the public administration.
Greece reported about one newly created authority at central level as well as
fourteen supporting Committees, for the purpose of the implementation of
environmental liability.
Ireland indicated running costs of one person per year.
Italy indicated in qualitative terms a "high amount of necessary human and
technical resources".
The United Kingdom reported an "educated guess" in the region of 15 full time
equivalent staff years in relation to the preparation of the transposing legislation,
supporting guidance, staff training and communication activities while ongoing
implementation costs are relatively modest.
The EU Directive on the protection of the environment through criminal law, called
Environmental Crime Directive (ECD) (Directive 2008/99/EC), lays down a list of
environmental offences that must be considered criminal offences by all Member States.
The Directive requires EU Member States to attach to the existing prohibitions criminal
sanctions and that legal persons can be held liable for offences committed for their
benefit. This responsibility can be of criminal or other nature. However, the directive
does not lay down measures concerning the procedural part of criminal law nor does it
touch upon the powers of prosecutors and judges.1356
1354 For more information, please see: European Commission (2019). Environmental Liability. Retrieved from:
https://ec.europa.eu/environment/legal/liability/index.htm. 1355 Brussels, 14.4.2016 COM(2016) 204 final REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN
PARLIAMENT Report from the Commission to the Council and the European Parliament under Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. Retrieved from:
https://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-204-EN-F1-1.PDF. And COMMISSION STAFF WORKING DOCUMENT REFIT Evaluation of the Environmental Liability Directive Accompanying the
document Report from the Commission to the European Parliament and to the Council pursuant to Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage.
SWD/2016/0121 final. Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2016:121:FIN. 1356 For more information see European Commission (2019). Combating Environmental Crime. Available at:
https://ec.europa.eu/environment/legal/crime/index.htm.
385
The Impact Assessment1357 for this Directive remains generally very vague and primarily
assesses the possible impacts in terms of “slight” and “strong” positive or negative
impacts. The possible impacts on public authorities are described very generally and no
quantification of costs is provided. The information on impacts on public authorities for
the two main policy options is described in the table below. Policy option 2, which aims
to encourage cooperation among MS on a voluntary basis, would consist of the
Commission organizing workshops or meetings of relevant authorities in the Member
States to exchange knowledge on the different environmental crime laws in order to
initiate and improve cooperation between Member States in the fight against
environmental crime. Under policy option 3, the Commission would present a proposal
for legislation on the protection of the environment through criminal law. This would
oblige MS to accept certain goals but allow for flexibility regarding the implementation
into their national laws and the right to take or keep measures that go beyond the
proposed EC standard.
Table 8.22 Estimated impacts on public authorities in the Impact Assessment of
the EU Directive on the protection of the environment through criminal law
Regulatory Option Impact on public authorities
Policy Option 2: Encourage
cooperation between Member
States
Awareness-raising activities conducted by the
Commission on a voluntary basis would only involve very
limited costs for public authorities
Benefit would be the improvement of contacts between
public authorities from different Member States
Not expected to lead to big changes to the differences in
criminal sanctions throughout the Community
Policy Option 3: Set minimum
regulatory standards
Potentially higher costs of more criminal proceedings in
some MS
Possible is also the contrary, i.e. fewer proceedings
because of deterrent effect
A review was carried out by EFFACE (European Union Action to Fight Environmental
Crime), a 40-month EU funded research project. The objective was to assess the impacts
of environmental crime as well as effective and feasible policy options for combating it
from an interdisciplinary perspective, with a focus on the EU. The project ended in March
2016.The final synthesis1358 report concluded that one of the main challenges was data
and information management in the area of environmental crime. Concerning the
potential impacts for public authorities it reports that “Information on the sanctions
effectively imposed by the judiciary is also lacking. Such information is often not
collected in a consistent way by Member States; as a consequence, no reliable or
comprehensive data is available for the EU, either. If that type of information is lacking,
it becomes very difficult to judge to what extent criminal enforcement can be considered
as ‘effective, proportionate and dissuasive’ as required by the ECD.”
1357 European Commission (2007). COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
on the protection of the environment through criminal law IMPACT ASSESSMENT. Retrieved from: https://ec.europa.eu/smart-
regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf. 1358 European Union Action to Fight Environmental Crime (2016). ENVIRONMENTAL CRIME AND THE EU - Synthesis of the
Research Project “European Union Action to Fight Environmental Crime” (EFFACE). Retrieved from:
efface.eu/sites/default/files/publications/EFFACE_synthesis-report_final_online.pdf.
386
When discussing the system of sanctions, the report mentions as “one weakness of the
system of sanctions, which is being defined by Member States in the absence of
harmonized EU rules on the matter, is that the mix of sanctions
(administrative/criminal/civil) at Member State level is not always optimal. While some
Member States do have possibilities for administrative authorities to impose specific
measures, in others these powers seem either to be missing or are rarely applied. […]
The same is true concerning the system of administrative fines.” The report then
provides an overview and comparison of the different types of approaches and sanctions
to addressing environmental crime. As part of this overview it also briefly describes and
compares the expected cost for the state arising from the different systems (see Table
below), but it does not provide any cost estimates.
Table 8.23 Expected costs for public authorities from criminal, administrative
and civil law approaches to addressing environmental crime in EFFACE
synthesis report
Criminal law approach Administrative approach1359 Civil law suits
Costs of proceedings born
mostly by state; relatively high
costs for the state due, among
others, to high threshold of
proof and length/complexity of
proceedings
Typically, lower costs for the
state than in criminal
proceedings, among others
because of less complex
proceedings
Relatively low costs for the
state, but often high costs for
the parties, as they are
responsible for producing
evidence
2. Methodology
2.1 Economic and Social Impact Assessment
The economic and social impacts assessment of regulatory options covers the following
subjects:
Company-level impacts (costs and benefits)
Sector- and economy-wide impacts (costs and benefits)
Social impacts in the EU and non-EU countries with a particular focus on
employment and employment conditions
Impacts on the public authorities in the EU’s Member States (costs)
2.1.1 Economic Impacts: Company-level, sector- and economy wide impacts
For company-level as well as sector- and economy-wide impacts, we outline impacts
related to the additional cost burden on the basis of the proposed options, potential
commercial benefits resulting from the proposed measures and analyse their implications
for competitiveness, international trade relationships and the innovative capacities of
European businesses.
We start with a detailed evaluation of the survey responses, particularly with respect to
the cost estimates and respondents’ statements regarding the potential commercial
1359 “Regarding terminology, it should be noted that what is referred to as administrative sanction or measure in most
countries, may be a called a “civil sanction” or similar in common law systems like in the UK.”
387
benefits. Due to the large amount of data, we restructure the data to identify patterns
and differences in the potential impacts between large companies and SMEs and
variations between different sectors of the economy. We also perform a sanity check of
the information given by the respondents to identify and correct for inconsistencies.
Costs
Company-level: Based on the survey results, we take into consideration estimations for
DD-related costs. We consider for estimates from companies with no experiences in DD
activities as well as companies’ that already undertake DD activities, i.e. current DD
practices and the costs associated to these activities. For different groups of companies
(large companies vs. SMEs; experienced vs. non-experienced), we quantify the
differences in costs for each of the proposed policy options. To account for potential
economies of scale, the quantification of both absolute costs and relative increases in
costs is based on companies’ size (by number of employees) and annual sales levels.
The resulting estimates are checked against the findings of related literature, particularly
previous impact assessments of related policies, e.g. the EU and US conflict minerals
regulations, the EU Timber Regulation, and the EU Non-financial Reporting Directive.
Sector-level: We calculate sector-specific impacts on the basis of the estimates gathered
from the survey respondents’ and estimates provided by additional literature. Based on
the discussion with the client, we provide cost estimates for EU companies that operate
in mining and extraction industries, textile industries and companies trading and
manufacturing food products and agricultural commodities. To determine sector-specific
cost impacts, the company-level cost estimates are extrapolated on the basis of data
from the EU’s business demography database, which provides statistics for a wide range
of economic activities, including the number of companies by sector and revenue
data.1360
Economy-level: The results of the sector-level analysis are extrapolated for the
estimation of an EU economy-wide impact.
SMEs: Specific attention is paid to SMEs. We link the company-level estimates for SMEs
to data from the EU’s Structural Business Statistics for SMEs, which provides annual
enterprise statistics for SME activities by size class for all sectors of the economy.1361
Impact on innovation and long-term competitiveness: The analysis of the impact on
innovation and long-term competitiveness of EU businesses is based on the proceeding
cost-benefit analysis and literature on the impact of regulation on innovation.1362 The
discussion is largely qualitative by nature as the determinants of innovation are
numerous and difficult to disentangle.
Use of new technologies: we discuss how the use of new (digital) technologies can
contribute to cost savings regarding the implementation of DD policies.
Benefits
1360 Database on Structural Business Statistics and Global Business Activities. Available at
https://ec.europa.eu/eurostat/web/structural-business-statistics/entrepreneurship/business-demography. 1361 Database on Structural Business Statistics for Small- and Medium-sized enterprises. Available at
https://ec.europa.eu/eurostat/web/structural-business-statistics/structural-business-statistics/sme. 1362 See, e.g., Blind, K. (2012). The Impact of Regulation on Innovation. Nesta Working Paper No. 12/02. Available at
https://pdfs.semanticscholar.org/5877/b0b479ac929d776c6b2212295b2e5450de22.pdf.
388
Company-level: Potential economic benefits, which may arise from the different policy
options, are discussed based on the survey results and complemented by findings from
the literature. The survey respondents’ ratings regarding different types of benefits for
each regulatory option are presented and discussed for each policy option. Where
literature findings could be associated with the assessed policy option these were
discussed in relation to the respective policy option.
Sector-level: Depending on the availability of relevant information, we consider the
literature as well as survey replies to derive sector-level impacts, which are discussed
qualitatively.
SMEs: Where possible, the discussion of benefits also pays specific attention to SMEs.
Based on the differences in the survey responses that can be attributed to differences in
firm size, we provide a discussion of the benefits in the context of the findings regarding
the main activities and sectors of EU SMEs.
2.1.2 Social Impacts in the EU and non-EU countries
The analysis of the social impact largely focuses on the impact of the proposed policy
options on employment and working conditions in the EU and non-EU countries. We take
into consideration potential positive and negative impacts which may arise under the
different policy options and briefly discuss potential adverse impacts in third countries.
The analysis is mainly qualitative. Based on the estimates derived in the firm level
assessment, we provide estimations about potential employment effects for the EU.
2.1.3 Impacts on the public authorities in EU Member States
We provide a discussion of the administrative burden for EU Member States’ authorities
as well as potential benefits for each policy option. This analysis is informed by reports
on the costs of law enforcement for related policies in different Member States and
include the findings from related impact assessments.
2.2 Human Rights and Environmental Impact Assessment
The human rights and environmental impact assessment covers the following subjects:
Environmental impacts, including impacts on climate, resource efficiency and
biodiversity;
Impact on fundamental rights obligations and international commitments, focused
in particular on children and other vulnerable communities.
2.2.1 Impacts on Human Rights
For the human rights impacts assessment, we outline impacts arising from due diligence
mechanisms related to:
Obligations and international commitments (supply-side of human rights)
Ability of rights-holders to demand duties be met; (demand-side of human rights)
Impacts on children and vulnerable communities
389
While the original project objectives included an issue-specific analysis of policy options
regarding the rights of the child and child labour within agricultural supply chains, it was
expressed by stakeholders that the analysis should be cross-sectoral. As such, DG Just
and the research team prioritized a cross-sectoral methodology and expressly excluded
issue specific options from the scope of the mandate.
An in-depth review of the survey responses particularly focuses on respondent’s
expectations of the ability of the four policy options to have an impact on human rights.
Distinguishing between stakeholder estimations and self-reported expectations from
business representatives, the estimated impacts on specific human rights is assessed.
Potential increases in both the supply-side and demand-side of human rights which may
arise from the different policy options are explored employing survey results as well as
evidence from existing literature. As respondents were asked to provide expected
impacts that may arise from each policy option, the analysis can benefit from both an
analysis of each option across sectors and across human rights obligations and
international commitments. The varying expected levels of impact are assessed for a
preliminary assessment of the capacity of each policy option to further meet obligations
and international commitments.
2.2.2 Environmental Impacts
For the environmental impacts assessment, we outline impacts arising from the due
diligence mechanisms related to:
meeting international standards;
potential effects on the climate;
resource efficiency;
and biodiversity
The analysis begins with an in-depth review of the survey responses, paying specific
attention to the respondent’s expectations of the various due diligence options’ ability to
have an impact on the environment. Thereafter, the estimated impacts within specific
areas of environmental sustainability are assessed, particularly differentiating between
stakeholder perceptions and self-reported impacts along companies’ supply chains. The
analysis ensures to review geographical areas of operation and current realities. Finally,
the analysis as much as possible links results from the economic impacts analysis for a
discussion on a sector’s expectation to decrease environmental impacts via due diligence
requirements and faced costs to arrive at an understanding of the realistic possibilities of
the changes.
To assess impacts on climate change mitigation, we assess companies’ current due
diligence practices and the self-reported survey results from their expected impacts of
new due diligence regulations. Considering the wide range of industry representation,
the analysis takes into account the varying levels of possible contribution to climate
change – for example in recognition that some sectors such as manufacturing, mining,
agriculture, and transport may have greater impacts than others, such as education.
Findings are cross-checked against relevant literature where possible.
390
Potential increases in resource efficiency which may arise from the different policy
options is explored employing survey results as well as evidence from existing literature.
As respondents were asked to provide the level of expected impact (not significant –
very significant) that may arise from each policy option, the analysis can benefit from
both an analysis of each option and across sectors. As already noted, the study takes
into account that some sectors may have a greater capacity to increase resource
efficiency due to already larger existing environmental impacts because of the nature of
the industry itself.
3. Analysis
The following section sets out the preliminary analysis for the assessment of regulatory
options. It is based on and draws from the literature review, the assessment of the
survey results, and the findings from the Market Practices and Regulatory Review
sections. The impact assessment combines quantitative and qualitative approaches as
far as possible and aims to discuss and assess possible costs and benefits of the different
policy options in the following areas: economic impacts, social impacts, environmental
impacts, impacts on human rights, and impacts on public authorities in the EU. Due to
the differing approaches and conceptual elements between the economic impact
assessment and human rights, environmental, and social elements, this section first
introduces the economic analysis independently, investigating impacts of the four policy
options. Thereafter, the study follows with an analysis of each policy option and their
specific impacts on social elements, human rights, and environmental concerns.
It is important to underline, however, that this assessment of regulatory options
discusses rather broad policy options as this is only a preliminary study. It is not possible
to assess the potential impacts in more detail until the concrete elements of each policy
option have been defined, for example during any consultations on a regulatory
proposal. The following impact assessment is therefore to be read in light of these
limitations, and should be taken as a general discussion of potential impacts which could
arise and should be taken into account if and when a new regulation is designed.1363
Moreover, it is important to stress that the assessment aims to quantify impacts where
possible, but that the quantification of costs and benefits in impact assessments is often
difficult due to the lack of appropriate data. It is especially difficult to quantify impacts
for the non-economic impact areas as the quantification and monetization of social and
environmental costs and benefits requires sophisticated methodologies and data to
estimate approximations and there are only few impact assessments of similar
legislations which contain data that can be used for this analysis.
In a report assessing approaches to quantification in impact assessments, a previous
study found that in practice the extent of quantification is lower than what could be
assumed from official commitments to using cost-benefit analyses and the available
guidance on methodologies.1364 Moreover, the authors point out that methodological
1363 For example, according to Tool #8 of the European Commission’s Better Regulation Toolbox and Guidance, a full-scale IA is
most commonly implemented throughout 12 full months. This may be longer or shorter depending on various factors including
the significance of the foreseen policy impacts, data availability, and the stakeholder consultation strategy/process. Given the large scope of the study at hand, and depth of collected data via the stakeholder consultation, the team prioritized the analysis
from an approach it understood as both most helpful to inform DG JUST’s policy approach, as well as feasible given the
limitations of a shorter timeframe. See Better Regulation Tool #8, available at:
https://ec.europa.eu/info/sites/info/files/file_import/better-regulation-toolbox-8_en_0.pdf 1364 Thiessen, J. et al. (2013). Quantifying the Benefits of Regulatory Proposals: International Practice. Basel: prognos, 2013.
In: Deringer, H. (2014). Cost-benefit analyses in trade regulation: How to assess the health impacts of non-tariff measures?
391
challenges arise particularly for impacts, which are not economic, such as "societal"
impacts in the form of social and environmental impacts. Assessing the extent of
quantification in impact assessments, the European Commission’s Regulatory Scrutiny
Board also found in its latest report that approximately 25% of EU impact assessments
fully quantify costs and benefits, but at the same time 20% of the reports are purely
qualitative.1365 The remaining reports use partial quantification. Similarly, a recent report
of the RSB/SG/JRC Working Group lists quantification tables of selected impact
assessments in 2017 and 2016. The list shows that, on the one hand, not many impact
assessments provide comprehensive quantitative information on costs and benefits and
those which do, provide estimates mainly for economic costs and benefits only.1366
In addition, due to the relative newness of relevant laws which require due diligence as a
legal standard of care, it has proven challenging to find impact assessments which have
been carried out for similar legislation, and where these were found they did not
necessarily include information and/or data which could be used for this analysis.
Especially when using quantitative estimates from other studies or impact assessments it
is important that the underlying activities or elements of the regulation on which such
estimates are based are very similar to those in the assessed regulatory options in this
impact assessment. Otherwise, if the estimates are based on activities or elements
which are too different, such estimates cannot be used as proxies for possible costs or
benefits.
Furthermore, not all studies which refer to links between sustainable business activities
and company performance in the long and short term are informative for the purposes of
considering potential impacts on companies, because these studies are usually about
wider “sustainability” questions and their impact on company performance. However,
due diligence as a legal standard or duty of care in this case requires companies to
exercise the care required to prevent and address external harm, regardless of whether
such harm is beneficial, detrimental or neutral to the company’s performance in the long
or short run. In this way, due diligence in this impact assessment differs, for example,
from the requirements of the EU NFRD, which requires information relating to the
company’s performance.
The following table provides an overview of key regulations and the available impact
assessments as well as the information contained therein relating to the assessed impact
areas. As Table 8.24 shows, for national laws there are no impact assessments which are
publicly available (or which have been carried out). In addition, since this is a very new
area of regulation, information on potential impacts is scarce. A recent research paper on
human rights and environmental due diligence legislation concludes that most
legislations on disclosure and due diligence policies have only been “implemented
recently, or are currently underway, meaning impact assessments and evaluations are
expected in the coming years in several countries”.
MILE Thesis. Bern: WTI Institute. Retrieved from: https://www.wti.org/research/publications/952/cost-benefit-analyses-in-trade-regulation-how-to-assess-the-health-impacts-of-non-tariff-measures/ 1365 European Commission (2019). Regulatory Scrutiny Board – Annual Report 2018. Retrieved from:
https://ec.europa.eu/info/publications/regulatory-scrutiny-board-annual-report-2018_en. 1366 European Commission (2018). Report of the RSB/SG/JRC Working Group - Quantification in Commission Impact
Assessments and Evaluations. Retrieved from: https://ec.europa.eu/info/publications/report-rsb-sg-jrc-working-group-
quantification-commission-impact-assessments-and-evaluations_en.
392
Table 8.24 Overview of impact assessments of key regulations and covered impact areas
Impact Assessments of
Key Legislation Economic Impacts Social Impacts Impacts on Human Rights Environmental Impacts
Impacts on Public
Authorities
EU Commission Impact
Assessment on Additional
Options to Combat Illegal
Logging (2008)
The assessment of
economic benefits is
based on circumstances
(reduction of illegal
imports) which are not
comparable to the
assessed regulatory
options. In addition,
economic impacts are
drawn from a partial
equilibrium trade model
and the results are
therefore very specific to
the modelled
circumstances and
particularities of the
forest industry.
The assessed regulatory
options and sectoral
focus are too different in
order to use the results
for this impact
assessment.
Focus is on sectoral
employment effects in
forest industry based on
impacts on production
resulting from a partial
equilibrium trade model.
Social aspects relating to
equal opportunities,
private life and access to
social welfare systems
are considered to not be
affected and are not
discussed.
The IA does not directly
assess human rights
impacts. However,
Option 4B requires a
certification of legality for
market operations of
timber products. The
absence of an
internationally agreed
definition of legality and
the issue of what would
constitute a credible
proof of it would
represent a considerable
challenge as there would
be a risk of accepting
“legality” documents
from countries with
human rights abuses.
This might indirectly
negatively impact
responsibility towards
rights holders as those in
violation might receive
illegitimate credibility.
While to different
extents, all policy options
are expected to reduce
the volume of illegal
logging, decreasing
destructive practices
such as:
high-grading, soil and
stand damage;
depletion of the forest
resource base and
threatening remaining
intact sites;
deforestation, erosion
sedimentation and
variations in
hydrological regimes
that lead to
degradation of land
and water resources;
loss of forest cover
due to informal roads
constructed by illegal
loggers;
and recurrent forest
fires.
Estimated regulatory cost
refers to government
activities which are not
representative of the
potential activities under
the assessed regulatory
options in this impact
assessment.
EU Commission Impact
Assessment of EU NFRD
Proposal (2013)
General discussion of
economic benefits
referenced in the
analysis, no
quantification.
Vey broad and general
discussion of various
possible social impacts
without any details or
quantifications. Possible
Mandatory NFR is
expected to have a
beneficial impact on the
following fundamental
rights:
The preferred options of
reporting requirements
are expected to provide
the following positive
environmental impacts:
No considerable cost
expected for EU or MS
budgets.
393
employment effect
discussed generally
without any details,
quantification or data.
the workers' right to
information (Article 27
of the Charter of
Fundamental Rights of
the EU137)
human rights
awareness within
companies
reducing instances of
EU company
involvement in human
rights infringements
the right to non-
discrimination (Article
21 of the EU Charter)
Equality between
women and men
(Article 23).
Freedom to choose an
occupation and right
to engage in work
(Article 15)
Freedom of expression
and information
(Article 11)
More transparency;
better quality of
information on
companies’
environmental
performance;
increase in
environmental
awareness;
increase in
reputational costs for
misbehaviour
EU Conflict Minerals –
Assessment of Due
Diligence Compliance
Cost, Benefit and Related
Effects on Selected
Operators in Relation to
the Responsible Sourcing
of Selected Minerals
(2014)
General discussion of
economic benefits
referenced in the
analysis, no
quantification.
Impact assessment only
describes general survey
results, no detailed
discussion of social
impacts or quantification
of costs.
Both voluntary and
mandatory importing
certifications would
provide indirect benefits
by increasing demand for
ethically sourced
minerals. However,
mandatory certifications
may incentivize
companies to seek least
burdensome path to
compliance which could
Both voluntary and
mandatory importing
certifications would
provide indirect benefits
by increasing demand for
sustainably sourced
minerals. However,
mandatory certifications
may incentivize
companies to seek least
burdensome path to
compliance which could
Estimated administrative
impact for European
Commission and Member
State authorities used in
the analysis.
394
divert negative impacts
to other companies. An
import ban nonetheless
without a compliance
certificate is expected to
have positive impacts
through increased
government intervention.
divert negative impacts
to other companies. An
import ban nonetheless
without a compliance
certificate is expected to
have positive impacts
through increased
government intervention.
EU Impact Assessment
on Proposed EU
Regulation on
Sustainable Investment
(2018)
Economic benefits
discussed rather
generally not specifically
for firm-level. Data
provided only for specific
aspects such as cost of
ESG integration.
Social impacts not
assessed in detail. No
employment effects
discussed, no
quantifications.
Options 2 and 3 on
harmonization on
environmental taxonomy
both might potentially
have positive effects on
human rights as the
issue of uncertainty on
what sustainable
investments are is
partially addressed and
would help end-investors
identify sustainable
activities. Option 3b on
Mandatory disclosures on
sustainability objectives
is expected to increase
transparency on
achievement of such
objectives.
Options 2 and 3 on
harmonization on
environmental taxonomy
both might potentially
have positive
environmental effects as
the issue of uncertainty
on what sustainable
investments are is
partially addressed and
would help end-investors
identify sustainable
activities. Option 3b on
Mandatory disclosures on
sustainability objectives
is expected to increase
transparency on
achievement of such
objectives.
No impacts on public
authorities assessed,
only process of
evaluation described but
no cost estimates
provided.
EU Commission Action
Plan on Financing
Sustainable Growth – PRI
Assessment of the
Reform Areas for PRI
Signatories
Only an action plan, no
impact assessment. No
information on economic
impacts.
Only an action plan, no
impact assessment. No
information on social
impacts.
Only an action plan, no
impact assessment. No
information on human
rights impacts.
Only an action plan, no
impact assessment. No
information on
environmental impacts.
Only an action plan, no
impact assessment. No
information on impacts
on public authorities.
EU Impact Assessment of
Directive 2008/99/EC on
Impacts described very
generally and no
Impact on employment
or other social impacts
No discussion on direct
human rights impacts.
Both options 2
(encourage cooperation)
Impacts described very
generally and no
395
the protection of the
environment through
criminal law (evaluation
ongoing1367)
quantification is
provided.
not discussed. However, possible
indirect impacts include
increase in human health
as harmonization of
environmental offence
definitions may facilitate
the targeting of most
serious cases.
and 3 (set regulatory
standards) can be
expected to have positive
impacts. Both would
increase public
awareness and increased
sanction levels and
scopes of liability for
environmental
protection.
quantification of costs is
provided.
EFFACE Synthesis Report
(2016) on the ECD
Does not assess
economic impacts or
benefits for firms.
No discussion of social or
employment impacts.
No discussion of human
rights impacts.
Briefly compares
expected costs for the
state from different
sanction systems but
does not provide any cost
estimates.
EU Impact Assessment of
Directive 2012/18/EU -
Seveso III Directive
Economic benefits for
operators described only
very generally.
Impact on employment
or other social impacts
not discussed except for
few sentences.
Impacts on human rights
under all possible options
of the Seveso Directive
depend on how many
establishments will fall
under the Directive.
Specifically, under policy
option 4 which
establishes information
access to the public,
there would be positive
impacts on protection
levels for human health.
Effects on environmental
impacts not discussed in
detail.
Limited usefulness of
described activities of
public authorities, costs
related to provision of
information to the public
and information
management system
partly used.
Report on
Implementation of EU
Directive 2004/35/EC -
Economic benefits to Does not assess any
social or employment
The ELD increases
recognition of rights
Because the ELD is not
coordinated or
Report concludes that not
possible to draw sound
1367 See: https://ec.europa.eu/info/law/better-regulation/initiatives/ares-2018-4981980_en
396
Environmental Liability
Directive (no IA
available)
firms are not discussed. impacts. holders under Articles
7(4) and 12 which
confirm a person who
could be affected by the
damage, or with a
legitimate interest, as
well as environmental
NGOs, have rights to
request and receive
information regarding the
implementation of
prevention and remedial
measures.
harmonised with the
Habitats Directive, any
positive impacts for
environmental protection
are at risk. While a key
added value of the ELD is
the possibility to attribute
strict liability to an
operator for damage to
biodiversity, the
distinction between strict
liability and fault based
liability across different
types of activities makes
it difficult to prove causal
links.
conclusions on
administrative costs.
EU Timber Regulation
Implementation Report
(2017)
No discussion on
economic benefits.
No discussion on social
and employment impacts
No discussion on human
rights impacts.
The EUTR demonstrated
to be highly relevant for
tackling illegal logging
and related trade by
changing market
behaviour patterns and
freeing supply chains
from illegally harvested
timber. Notably, the
EUTR establishes uniform
rules, and is coherent
with other relevant policy
instruments.
MS reported on human
and financial resources of
Competent Authorities
but data quality very low.
French Vigilance Law No available IA No available IA No available IA No available IA No available IA
Dutch Child Labour DD
Law
No available IA No available IA No available IA No available IA No available IA
397
Italian Decree on Due
Diligence
No available IA No available IA No available IA No available IA No available IA
Spanish Law on
Environment + HR
No available IA
The economic report of
the 2008 Draft of reform
of the Criminal Code was
not presented.1368
No available IA No available IA No available IA No available IA
Swiss Advanced
Legislative Proposal
No available IA No available IA No available IA No available IA No available IA
1368 In a congress report on the Draft it says: “A second element that leads this Parliamentary Group to present this amendment to the whole is the absence of an economic report…” Source:
http://www.congreso.es/public_oficial/L9/CONG/BOCG/A/A_052-09 .PDF, p. 7. . Something similar is indicated in a report by the Judiciary.
398
3.1 Economic Impacts across Regulatory Options
3.1.1 General remarks
We considered several impact assessments of related EU regulations to inform the
methodology of this economic impact assessment. However, we note that the suitability
of impact assessments of existing studies, e.g. the EU Conflict Minerals Regulation, the
EU Non-financial Reporting Directive, the EU Timber Regulation, the Directive on the
Protection of the Environment through Criminal Law and the Directive on the Control of
Major-accident Hazards Involving Dangerous Substances, is limited. Generally, while
some of these assessments provide quantitative estimates, others discuss impacts only
qualitatively.
Detailed descriptions of the impact assessments conducted for the EU Conflict
Minerals Regulation and the EU Non-financial Reporting Directive are provided in the
literature review. The impact assessments of these regulations have some
commonalities, but also show differences regarding the methodologies applied by the
consultants. Both studies’ shortages generally include a lack of publicly available
industry data and a high variation in the quantitative and qualitative information
collected through surveys and consultations. Costs were usually expressed in annual
numbers on a per company basis. The authors also differentiated between large
companies and SMEs (typically companies with less and more than 250 employees,
according to Eurostat definitions).1369 Cost estimates are based on survey data or
publicly available information. Estimates were provided for internal labour cost (staff
cost or staff time) and external costs (e.g. cost for consultants, external auditing
costs, training costs).
The impact assessment of the EU Timber Regulation provides cost estimates for the
EU level (EU aggregate). Considering different technological tracking solutions,
several cost estimates were calculated on a per cubic metre basis for traded wood
products. Firm-level economic benefits of the EU Timber Regulation were assessed
qualitatively.
For the Directive on the Control of Major-accident Hazards Involving Dangerous
Substances, ranges of ‘administrative cost’ estimates have been taken from a
number of separate studies, while the economic benefits have been discussed
qualitatively. The estimates are rather rudimentary and, as noted by the authors of
the study, should be interpreted with caution.
For the Directive on the Protection of the Environment through Criminal Law, both
firm-level cost and benefits have been discussed qualitatively. The impact
assessment does not provide quantitative estimates.
The economic analysis is to a large extent based on the responses of business
stakeholders, which come with a number of shortages:
1369 In the impact assessment of the EU Non-financial Reporting Directive, all options analysed are intended to cover only
companies having more than 500 employees. Consequently, no administrative burden was found for SMEs.
399
1) Due to the lack of existing examples of DD regulation, and the preliminary nature
of this study which does aim to formulate a regulatory proposal, the regulatory or
policy options are only expressed in broad terms. Many stakeholders have
different experiences with laws that relate to due diligence reporting and
administrative requirements. In addition, stakeholders do not yet have the
benefit of court judgments which clarify how recent laws such as the French Duty
of Vigilance Law will be applied, and how their companies should respond. This
results in varying expectations among the respondents with regard to the legal
obligations and companies’ activities necessary to comply with these obligations.
The time and cost estimates given by the respondents may therefore not reflect
the real additional burden that would result from DD activities. It should be noted
that respondents may have over- and underestimated the impact of the outlined
policy options, not least due to the fact that there is relatively little or no existing
examples of DD regulation which informs their experiences and knowledge. This
may explain why the data provided by large companies (1000+) which are
already undertaking DD appears to be most reliable, as these are the companies
which are most likely to be subject to existing regulation (which applies
predominantly to large companies), as well as existing industry standards.
2) It is also noted that the survey indicated that the majority of respondents which
are responsible for due diligence are within the corporate social responsibility
teams of their companies. These respondents would not necessarily be able to
give more adequate time and/or cost estimates relating to new legal implications.
Cost and person-day requirements critically depend on many individual company
characteristics, such as company size, the number of suppliers, (B2B) customers
or the degree of software utilisation for corporate management in general and
value chain management in particular.
3) Company-level impact analysis would take a considerable amount of time for
corporate planners and controllers, particularly in larger companies. It is
questionable whether such analyses indeed informed respondents’ estimations,
given the short periods of reply.
4) The data given by the respondents is patchy. As outlined above, the data also
show a high level of variation within and among companies of different size
classes. At the same time, the correlations with proxies for company size (e.g.
the number of sectors) and the size of the value chain (e.g. the number of
suppliers) are low. In addition, data on company-specific supply chains is not
publicly available. It is therefore difficult to control and differentiate for supply
chain size effects.
5) Due to the lack of more adequate data, and similar to other studies, we classify
companies’ size according to the number of employees. At the same time, it
should be noted that the extent of a company’s value chains does not necessarily
correlate with the number of its employees or the number of its suppliers and/or
customers. Some services companies might be human capital-intensive
(employees-intensive), but source material from a low number of suppliers. By
contrast, manufacturers that rely to a substantial degree on automation might
have a low number of their own employees, but source materials from a great
number of suppliers.
400
6) The numerical estimates given by the respondents do not reflect where
respondents’ companies source their products and services. In other words, we
cannot account for companies that are to a large extend engaged in developing
countries’ markets, where some of the most prominent human rights and
environmental risks may occur. It is assumed that companies sourcing in
developing countries are likely to face higher compliance costs than companies
that exclusively source from and sell on local markets within the EU. For the
former group of companies, our estimates might underestimate the time and cost
burden resulting from DD activities. Whilst recognising these limitations, it should
also be noted that companies’ most prominent human rights and environmental
risks do not take place exclusively outside of the EU. For example, exploitation of
migrant workers and modern slavery within the EU are increasingly well-
documented. As a result of the complexity and non-transparency of globalised
supply chains, there is a general lack of knowledge about the real impacts of
companies’ supply chains, whether inside or outside of the EU. This is another
limitation of the data relied on in this study.
7) Moreover, it is important to keep in mind that the same legal duty could manifest
differently in practice for different economic operators (e.g. producers,
manufacturers, authorised representatives, importers and distributors). Although
the legal duty would be the same independently from where the company is in
the value chain, the economic and activity burden could differ depending on the
risk and context of a company. As a result, in practice the duty could have
different economic impacts depending on the company’s place in the chain, the
due diligence already undertaken by others, its assessment and prioritisation of
its risks, and other risk factors.
8) It should be noted that other studies also suffer from these limitations. It should
also be noted that we developed estimates that go beyond most existing studies.
For firm-level costs, for example, we provide estimates for large companies,
SMEs as well as aggregate numbers for some sectors and the corresponding EU
aggregates.
It should also be noted that these economic impacts are measured in relation to a
change from the status quo. However, the status quo is expected to change as the
various fast-moving developments noted elsewhere in this study continue. These include
legal developments around possible mandatory due diligence law in Member States, and
increasing investor and financial focus on due diligence requirements. Within this
context, it is critical to remember that stakeholders across the spectrum have expressed
a discontent with the current legal landscape. Survey results show that stakeholders
perceive the current laws in this area as not being effective, efficient and clear, and have
noted various disadvantages (including economic impacts) that companies suffer from as
a result. In this context, the Market Practices findings show that companies expect
certain benefits to arise from a mandatory duty which applies on a general basis,
including a level playing field and increased leverage through a non-negotiable standard.
While it is not possible to quantify these benefits at such an early stage, it should be
emphasised that these benefits may be significant, insofar as they could improve the
costs relating to risks that are present in the current status quo.
401
3.1.2 Company-level Costs
The company-level cost impact analysis is mainly based on responses received from 336
businesses. In the survey, companies were required to indicate the number of person-
days and costs related to certain human rights and environmental due diligence (DD)
activities. The respondents were not asked to provide estimates about the impact of
economic inefficiencies resulting from changes in companies’ supply chain management
due to DD activities.
The respondents were asked to provide numbers for four policy scenarios:
Option 1: No policy change
Option 2: Voluntary guidelines
Option 3: Mandatory DD reporting
Option 4: Mandatory DD throughout value chains
For person-days, the following due diligence and reporting activities were taken into
consideration:
1) Impact assessments & tracking effectiveness of actions
2) Training
3) Incorporation of standards into contracts / codes of conduct
4) Audits / investigations
5) Leverage (suppliers / investee companies / third parties) & collective engagement
6) Reporting activities
Respondents were also asked to indicate the total number of person-days estimated for
DD activities (“Alternative: Total days” in the business stakeholder survey).
For costs per activity, the following cost types were taken into consideration:
1) Cost of labour
2) Overheads
3) Cost of outsourcing / external services (including auditors & experts)
4) Cost of reporting
5) Other costs
Respondents were also asked to indicate the total cost estimates (“Alternative: Total
cost” in the business stakeholder survey).
402
Table 8.25 provides summary statistics for the number of respondents by size class and
type of DD already undertaken. While 159 respondents did not indicate whether their
companies already conduct certain DD activities, 137 respondents indicated that their
companies already undertake some DD activities. 13 respondents stated that their
companies do not yet undertake any form of DD activity for human rights or
environmental impacts. 25 respondents indicated that they “do not know” whether their
companies conduct any such DD activities.
Generally, the highest number of due diligence activities already undertaken is reported
by large companies with 1,000 and more employees (171 respondents). 63% of these
companies report that they already conduct some DD activities. 30% of these companies
report to already undertake “Human rights due diligence which takes into account all
human rights (including environment)”. 27% report to already undertake “Human rights
due diligence, but only in certain areas (for example health & safety, labour, non-
discrimination & equality, environmental, land rights & indigenous communities), and
4% state to conduct “Environmental / climate change due diligence (not extending
to other human rights)”.
At the same time, smaller companies with more than 50 but less than 1,000 employees
(61 respondents) report to conduct certain DD activities. 18% of these companies report
that they already conduct “Human rights due diligence which takes into account all
human rights (including environment)” and 15% report to already undertake “Human
rights due diligence, but only in certain areas (for example health & safety, labour, non-
discrimination & equality, environmental, land rights & indigenous communities). Smaller
companies (28 respondents) with less than 50 employees do generally not conduct any
due diligence activities.
403
Table 8.25: Respondents by size class and type of DD already undertaken
Company size Total
Human rights due
diligence which takes
into account all
human rights
(including
environment)
Human rights due diligence, but
only in certain areas (for
example health and safety,
labour, non-discrimination and
equality, environmental, land
rights and indigenous
communities)
Environmental /
climate change due
diligence (not
extending to other
human rights)
My company does not / has
not yet undertaken any
form of due diligence for
any human rights or
environmental impacts
Do not
know
1000+ employees 171 51 47 6 3 13
500-1000 employees 19 5 1 2 1 2
250-500 employees 17 0 3 2 4 2
50-249 employees 25 6 5 3 3 1
10-49 employees 8 1 2 0 0 1
0-9 employees 20 1 1 0 2 6
No indication 74 1 0 0 0 0
Total 334 65 59 13 13 25
Source: Business and Stakeholder Surveys. Note the 159 companies did not reply to the question about due diligence activities already undertaken by their company.
404
The next sections provide graphical illustrations for the development of the number and
allocation of person-days by policy option. Accounting for outliers in the data, we outline
the empirical median values for the full sample of companies as well as the full sample of
large companies and large companies that, according to their stated information, already
undertake full DD activities.1370 Mean values as well as lower and upper quartiles are
reported in the literature review of the first interim report. For the sake of completeness,
we also report numbers for smaller companies. Due to the low number of responses for
small company respondents, numbers for smaller companies should be interpreted with
caution.
The given estimates for the number of person-days turn out to be patchy. Many
companies only provided estimates for some DD activities. Others only provided
estimates for total person-days. For some activities we detected large differences
between mean and median values in both the indicated person-day and total cost
estimates. Generally, the highest number of person-day estimates is available for large
companies (500-1,000 and 1000+ employees). By contrast, only little data is available
for companies that do not yet conduct such DD, mainly medium-sized and small
companies with 0 to 500 employees.
About 30% of companies with more than 1,000 employees already undertake “Human
rights due diligence which takes into account all human rights (including environment)
and some 27% of these companies already undertake ”Human rights due diligence, but
only in certain areas (for example health & safety, labour, non-discrimination & equality,
environmental, land rights & indigenous communities)”. The most consistent data was
provided by respondents from companies that already conduct full human rights and
environmental DD or certain parts of it.
Estimated person days by activity and policy option
Estimated person days in the full sample of companies
As shown by Figure 8.1 for the full sample of respondents (which is comprised of
experienced and less experienced respondents with respect to DD activities), “Impact
assessments & tracking effectiveness of actions” (e.g., 10 person-days per month for
mandatory DD) and “Audits / investigations” (e.g., 10 person-days for mandatory DD)
are the most person-day-intensive activities. This is followed by “Training” activities e.g.,
10 person-days for mandatory DD) and activities related to “Leverage (suppliers /
investee companies / third parties) and collective engagement” (e.g., 6.5 person-days
for mandatory DD). Mere reporting activities are less person-day intensive.
The numbers also indicate that many companies already conduct DD activities that go
beyond complying with voluntary guidelines. The aggregate number of person-days
indicated for compliance with new voluntary guidelines under regulatory Option 2 is
somewhat lower than what companies state for the status quo activities under Option 1
(i.e. the sum of person-days stated for individual activities). However, the total cost
estimates (“Alternative: Total days” in the survey) indicate that the number of required
person-days is higher for activities under “New voluntary guidelines” when compared to
the “Status quo”. The slight decrease in the number of required person-days for “New
1370 Accounting for outliers in the data, we outline the empirical median values for the full sample of companies as well as the
full sample of large companies and large companies that, according to their stated information, already undertake full DD
activities (the empirical mean values, which are often distorted by outliers, are reported in the first interim report).
405
voluntary guidelines” results from differences in the respondents: some respondents who
proved estimates for the “Status quo” did not provide estimates for “New voluntary
guidelines” and vice versa. For those companies that indicated person-day requirements
on a DD activity basis, the numbers indicate that companies already conduct activities
that likely go beyond those prescribed by voluntary guidelines. For those companies that
indicated total person-day requirements, the numbers reflect less experienced
companies’ expectations regarding the labour cost impact resulting from voluntary
guidelines, which is, as expected, estimated to be higher than for the status quo
situation. At the same time, the increase in the number of person-days required for
mandatory DD reporting and mandatory DD throughout companies’ value chains is also
in line with our expectations: more comprehensive DD activities would require additional
person-days compared to the status quo.
Compared to the status quo, the increase in estimated person-day requirements is about
100% if companies would have to undertake mandatory DD throughout their value
chains in terms of regulatory Option 4. Compared to the status quo, the increase in
person-days required is about 50% if companies would have to comply with new
reporting requirements only in terms of regulatory Option 3. It should be noted a policy
shift from reporting requirements to mandatory DD throughout companies’ value chains
would result in relatively high increases in the person-days required particularly for
trainings and audits/investigations.
Figure 8.1: Development of number and allocation of person-days by policy
option, all business respondents (in person-days per month)
Source: Business and Stakeholder Surveys. Numbers indicated: median values for person-days (8
working hours/day) per month.
0
10
20
30
40
50
60
Status quo New voluntary guidelines New reportingrequirements
Mandatory DD throughoutvalue chains
Reporting activities
Leverage (suppliers / investee companies / third parties) & collective engagement
Audits / investigations
Incorporation of standards into contracts / codes of conduct
Training
Impact assessments & tracking effectiveness of actions
406
Estimated person-days in the full sample of all large companies (1000+ employees)
As shown by Figure 8.2, the person-day requirements of large companies are generally
higher than the average and median values of the full sample of companies. This is
because large companies tend to have more DD requirements because of their relative
size, e.g. the number of business divisions and the number of suppliers and customers.
At the same time, this sample of companies included companies that are already
undertaking DD and are therefore likely to have more realistic understanding of the costs
involved.
At the same time, similar patterns apply for the relative allocation of estimated person-
days. The responses from large companies with 1,000 or more employees indicate that
“Impact assessments & tracking effectiveness of actions” (e.g., 12 person-days for
mandatory DD per month) and “Audits / investigations” (e.g., 12 person-days for
mandatory DD) are the most person-day-intensive activities. “Training” activities and
activities related to “Leverage (suppliers / investee companies / third parties) &
collective engagement” (e.g., 9 person-days for mandatory DD) become absolutely and
relatively more person-day-intensive for new reporting requirements and mandatory DD
throughout companies’ value chains. The aggregate number of person-days indicated for
compliance with new voluntary guidelines is somewhat higher than what companies
state for the status quo (i.e. the sum of person-days stated for individual) activities. The
same pattern applies for total cost estimates (“Alternative: Total days” in the survey),
which also indicate that the number of required person-days is higher for activities under
new voluntary guidelines compared to the status quo.
At the same time, the number of person-days required for new reporting requirements
and mandatory DD throughout companies’ value chains would require significantly more
person-days compared to the status quo. Compared to the status quo, the number of
person-days more than doubles (from 27 to 60 person-days per month) if companies
would have to undertake mandatory DD throughout their value chains (Option 4).
Compared to the status quo, the increase in person-days required is about 40% if
companies would only have to comply with new DD reporting requirements (Option 3)
(from 27 to 39 person-days). It should be noted a policy shift from new reporting
requirements to mandatory DD throughout companies’ value chains would result in
relatively high increases in the person-days required for “Trainings” (from 3 to 11
person-days) and “Audits / investigations” (from 6 to 12 person-days).
407
Figure 8.2: Development of number and allocation of person-days by policy
option, total of companies with 1000+ employees (in person-days per month)
Source: Business and Stakeholder Surveys. Numbers indicated: median values for person-days (8
working hours/day) per month.
Estimated person-days in the full sample of large companies (1,000+ employees) that
already conduct “Human rights due diligence which takes into account all human rights
(including environment)”
As shown by Figure 8.3, relatively high numbers for required person-days are reported
by large companies that already undertake certain “Human rights due diligence which
takes into account all human rights (including environment)”. Among these companies,
“Audits / investigations” are most person-day-intensive (e.g., 78 person-days for
mandatory DD) under the status quo, followed by “Impact assessments & tracking
effectiveness of actions” (e.g., 76 person-days for mandatory DD) and “Reporting
activities” (e.g., 60 person-days for mandatory DD). At the same time, these companies
report only a slight increase in person-days required for new mandatory reporting
requirements, but a rather substantial increase in person-days required for mandatory
DD throughout companies’ value chains. Compared to the status-quo, the total of
person-days required for individual activities quintuples (from 52 to 271 person-days) for
mandatory DD throughout companies’ value chains. The slight decrease in the number of
required person-days for “New voluntary guidelines” results from differences in the
respondents: some respondents who proved estimates for the “Status quo” did not
provide estimates for “New voluntary guidelines” and vice versa.
The stated number of person-days required for “Impact assessments & tracking
effectiveness of actions” (from 10 to 76 person-days), “Audits / investigations” (from 10
to 78 person-days), “reporting activities” (from 10 to 60 person-days) and “Training”
(from 9 to 39 person-days) activities increases tremendously for mandatory DD
throughout companies’ value chains. By contrast, relatively low increases are reported
-
10
20
30
40
50
60
70
Status quo New voluntary guidelines New reportingrequirements
Mandatory DDthroughout value chains
Reporting activities
Leverage (suppliers / investee companies / third parties) & collective engagement
Audits / investigations
Incorporation of standards into contracts / codes of conduct
Training
Impact assessments & tracking effectiveness of actions
408
for activities related to the “Incorporation of standards into contracts / codes of conduct”
as well as “Leveraging (suppliers / investee companies / third parties) & collective
engagement”.
It should be noted that of all the respondents groups, the estimates provided by this
group of large companies, i.e. large companies that already undertake due diligence,
appear to be most consistent with respect to the rise in person-day requirements
according to the escalation of the policy obligations, the (broad) scope of the regulations
and the activities companies would have to undertake to ensure regulatory compliance.
In particular, the patterns in the data provided by those which are already undertaking
DD activities are different to those indicated by the full sample, which also includes
companies with little experience in DD activities. Since these estimates were given by
large companies (with more than 1,000 employees) that can already draw on their own
experiences of DD and their empirical data, we consider the data provided by large
(1000+ employees) companies that are already undertaking DD most relevant for the
ongoing analysis. At the same time, we note that the size of these companies in terms of
revenues is very high. The median revenue of the respondents that provided both annual
revenue data and person-day estimates for the available policy options is 11.5 billion
EUR. The average revenue of the respondents that provided both annual revenue data
and person-day estimates for the available policy options is 29.3 billion EUR.
Figure 8.3: Development of number and allocation of person-days by policy
option, companies with 1,000+ employees that already conduct “Human rights
due diligence which takes into account all human rights (including
environment)” (in person-days per month)
Source: Business and Stakeholder Survey. Numbers indicated: median values for person-days (8
working hours/day) per month. Note that the median revenue of the respondents that provided
both annual revenue data and person-day estimates for the available policy options is 11.5 billion
-
50
100
150
200
250
300
Status quo New voluntary guidelines New reportingrequirements
Mandatory DD throughoutvalue chains
Reporting activities
Leverage (suppliers / investee companies / third parties) & collective engagement
Audits / investigations
Incorporation of standards into contracts / codes of conduct
Training
Impact assessments & tracking effectiveness of actions
409
EUR. The average revenue of the respondents that provided both annual revenue data and person-
day estimates for the available policy options is 29.3 billion EUR.
Estimated person-days in the sample of companies with 50 to 1,000 employees that
already conduct “Human rights due diligence which takes into account all human rights
(including environment)”
The estimates for companies with 50 to 1,000 employees that already conduct “Human
rights due diligence which takes into account all human rights (including environment)”
indicate that “Impact assessments & tracking effectiveness of actions” (e.g., 20 person-
days for mandatory DD) and “Audits / investigations” (e.g., 15 person-days for
mandatory DD) are the most person-day-intensive activities (see Figure 8.4). Compared
to the status quo, the number of required person-days would more than double as the
result of a policy shift towards mandatory DD throughout companies’ value chain. At the
same time, we note that the size of the respondents’ companies in terms of revenues is
substantially lower than those of large company respondents (1,000+ employees). The
median revenue of the respondents that provided both annual revenue data and person-
day estimates for the available policy options is 128 million EUR. The average revenue of
the respondents that provided both annual revenue data and person-day estimates for
the available policy options is 154 million EUR.
Figure 8.4: Development of number and allocation of person-days by policy
option, companies with 50-1,000 employees that already conduct “Human
rights due diligence which takes into account all human rights (including
environment)”
Source: Business and Stakeholder Surveys. Numbers indicated: median values for person-days (8
working hours/day) per month.
Estimated person-days in the sample of companies with less than 50 employees
Due to the lack of data, the person-day estimates provided by small companies with less
than 50 employees should be also interpreted with caution. Only one company with less
than 50 employees provided estimates for person-days by activity under the status quo.
As outlined by Figure 8.5, this company expects an equal distribution of person-days
-
20
40
60
80
Status quo Voluntary guidelines Mandatory DD reporting Mandatory DD throughoutvalue chains
Reporting activities
Leverage (suppliers / investee companies / third parties) & collective engagement
Audits / investigations
Incorporation of standards into contracts / codes of conduct
Training
Impact assessments & tracking effectiveness of actions
410
required for DD activities, amounting to 10 person-days for each activity for new
voluntary guidelines, new reporting requirements as well as mandatory DD throughout
companies’ value chain.
Figure 8.5: Development of number and allocation of person-days by policy
option, companies with 0-49 employees (in person-days per month)
Source: Business and Stakeholder Surveys. Numbers indicated: median values for person-days (8
working hours/day) per month. Note: These number should be treated with caution. The data
reflect the responses of 28 companies of which only two companies provide estimates for the
number of person-days required for certain DD activities.
The survey respondents also indicated expected total person-day requirements for the
available policy option. It should be noted that estimates for total person-day
requirement were often given by respondents that did not indicate person-days on a DD
activity basis. Table 8.26 provides a comparison of indicated total person-day estimates
per month by policy option and company size. For respondents that indicated person-day
requirements on a DD activity basis, the numbers provided for total person-days often
deviate from the sum of person-days indicated for individual DD activities. At the same
time, the numbers generally reflect the same patterns that prevail for individual DD
activities, i.e. a rise in required person-days resulting from a rise in DD obligations.
The numbers are generally highest for the total of companies with 1000+ employees
that already conduct “Human rights due diligence which takes into account all human
rights (including environment)”. It should be noted that for all companies with 1,000+
employees that already conduct “Human rights due diligence which takes into account all
human rights (including environment)” (13 respondents) the median value, as indicated
by Table 8.26 Table 0.1 below, decreases for mandatory DD throughout value chains
compared to new voluntary reporting requirements. If this pattern was valid, there
would be less person-days required for the mandatory DD than for new reporting
requirements. We consider these numbers counterintuitive and checked for average
values, which indeed point to substantially higher person-day requirements for
mandatory DD activities: The mean (average value) increases by about 30% from 293
-
10
20
30
40
50
60
70
Status quo New voluntary guidelines New reportingrequirements
Mandatory DD throughoutvalue chains
Reporting activities
Leverage (suppliers / investee companies / third parties) & collective engagement
Audits / investigations
Incorporation of standards into contracts / codes of conduct
Training
Impact assessments & tracking effectiveness of actions
411
person-days to 376 person-days for mandatory DD. Accordingly, the responses for this
group (13 responses) should be treated with caution. One explanation for this somewhat
paradoxical finding is that companies of different sizes indicated different cost estimates,
which show a high degree of variation. Due to data gaps, however, we cannot effectively
control for size effects.
412
Table 8.26: Total number of person-days per month, by activity, median values
Responses All business
respondents
Total of
companies with
1,000+
employees
Total of companies with 1,000+
employees that already conduct
“Human rights DD which takes into
account all human rights (including
environment)”
Companies with 50-1,000 employees
that already conduct “Human rights
DD which takes into account all human
rights (including environment)”
Companies with less
than 50 employees
Status quo
22 person-days
(46 respondents)
44 person-days
(37 respondents)
80 person-days
(14 respondents)
24 person-days
(1 respondent)
2 person-days
(4 respondents)
Voluntary
guidelines
33 person-days
(39 respondents)
48 person-days
(32 respondents)
133 person-days
(14 respondents)
-
10 person-days
(2 respondents)
Mandatory
DD
reporting
40 person-days
(37 respondents)
56 person-days
(30 respondents)
180 person-days
(13 respondents)
34 person-days
(1 respondent)
10 person-days
(4 respondents)
Mandatory
DD
throughout
value
chains
56 person-days
(33 respondents)
66 person-days
(29 respondents)
100 person-days
(13 respondents)
-
10 person-days
(4 respondents)
Growth rates compared to status quo
Status quo
Voluntary
guidelines 50% 9% 66% - 400%
Mandatory
DD
reporting
82% 26% 125% 42% 400%
413
Mandatory
DD
throughout
value
chains
155% 50% 25% - 400%
Source: Business and Stakeholder Surveys. Numbers indicated: median values of estimated person-days, based on replies to option “Alternative: Total days”.
414
Figure 8.6 provides a comparison of the 1st-quartile, median and 3rd-quartile values for
indicated total person-day estimates by policy option for large companies (1000+
employees) that already conduct “Human rights due diligence which takes into account
all human rights (including environment)”. The statistics generally reflect the same
patterns that prevail for individual DD activities, i.e. a rise in required person-days
resulting from a rise in DD obligations. It should be noted that these companies, which
have the most profound experience with DD activities, nevertheless show a relatively
high level of variation in the number of person-days required for DD activities. For
mandatory DD throughout companies’ value chains, the bottom 25% of these companies
(Q1 values) report less than 45 person-days, while to top 25% (Q3) report more than
550 person-days. Similar levels of variation are found for the other policy options.
Figure 8.6: Total estimated person-days, large companies (1000+ employees)
that already conduct “Human rights due diligence which takes into account all
human rights (including environment)”
Source: Business and Stakeholder Survey. Numbers indicated: median, 1st quartile (Q1), 3rd
quartile (Q3) values of estimated person-days, based on replies to option “Alternative: Total days”.
As shown by Table 0.1 and Table 0.2 in Part IV: Annexures, proxies for company size,
i.e. the number of sectors in which companies operate and the number of first tier
suppliers, indicate that an increase in business models (number of sectors) or an
increase in the number of suppliers (first tier suppliers) do not necessarily increase or
decrease the number of total person-days needed by large companies for DD activities.
According to respondents’ estimates there is no significant positive correlation between
the number of sectors and the number of required person-days and no significant
positive correlation between the number of first tier suppliers and required person-days.
80
133
180
100
31
28
40
45
256
331
350
550
Status quo
New voluntary guidelines
New reporting requirements
Mandatory DD throughout value chains
Q1, Median and Q3 values for man-days, large companies (1000+ employees) that already conduct full DD
Q3 Q1 Median
415
Estimated costs by activity and policy option
As outlined at the beginning of this Section, survey respondents were also asked to
provide estimates for the total annual costs by activity. It should be noted that the
number of given responses is generally higher for person-day estimates than for cost
estimates. This pattern applies for all size classes of companies. For companies with little
or no experience in DD activities, the numbers provided for cost estimates are often
inconsistent with respect to the escalation of policy obligations under the four policy
options. Many companies, especially those with little or no experience in DD activities,
stated higher costs for new reporting requirements than for mandatory DD in companies’
value chains. The lack of knowledge about the implications of mandatory DD regulation
could be explained by the lack of currently existing examples of such regulation,
particularly with application to SMEs. In contrast, reporting requirements may already
apply to larger companies, which informs their knowledge about the cost implications.
Due to the lack of responses and the inconsistencies in the cost estimates provided by
the respondents, we (similar to other impact assessments) consider person-day
estimates more representative than estimates for cost figures. Accordingly, the following
estimations are based on the person-day estimates given by the respondents.
Estimated costs of outsourcing / external services
While we consider the estimated sum of person-days indicated for individual DD
activities a more reliable basis for our estimations, we note that the “Cost of outsourcing
/ external services (including auditors & experts)” account for a relative high share of the
total costs stated by the survey respondents. The reported “Cost of outsourcing /
external services (including auditors & experts)” are often the second highest cost
component stated by the respondents, whereby other costs stated by the respondents to
a large extent overlap with respondents’ estimated labour costs, i.e. “Overheads” and
the “Costs of reporting”. “Other costs”, as stated by the survey respondents (<3%).
For the share of “Cost of outsourcing / external services (including auditors & experts)”
in the “Cost of labour”, Table 8.27 outlines numbers for different groups of business
respondents and policy options.
Table 8.27: Share of estimated “Cost of outsourcing / external services
(including auditors & experts)” in the estimated “Cost of labour”
Status
quo
New
voluntary
guideline
s
New
reportin
g
requirem
ents
Mandatory
DD
throughout
value
chains
All business respondents: 9% 34% 17% 25%
Full sample of large companies
(1000+ employees) 8% 5% 17% 26%
Companies with 1000+ employees
that already conduct “Human rights
due diligence which takes into
14% 9% 14% 13%
416
account all human rights (including
environment)”
Estimated costs for environmental due diligence
Most respondents did not provide estimates for required person-days and costs
associated with environmental DD. The low response rate may be attributed to the fact
that environmental DD was viewed by many respondents as being included in their
existing or anticipated DD activities, of which the estimated costs were discussed above.
Survey responses indicated that environmental and climate change due diligence is
currently usually not undertaken as a standalone process, but that it often takes place in
different teams from the human rights and environmental due diligence work. Moreover,
survey respondents also indicated that free-standing climate change due diligence is a
rather new concept of which many companies are not yet familiar with. Accordingly, we
received very limited differentiated information from businesses in this respect.
Only five companies that exclusively undertake environmental and climate change due
diligence (not including other human rights issues) provided person-day estimates for
environmental and climate change DD (see Table 8.28). Of these, three were companies
with 1,000 or more employees, one company with 50 to 249 employees and one
company with 250-500 employees. For those three companies with 1,000 or more
employees the numbers show a high level of variation and should be interpreted with
caution. One company that exclusively undertakes environmental and climate change
due diligence provided total cost estimates for environmental and climate change DD,
which amount to 23,000 EUR under the status quo and are expected to rise to 78,000
EUR annually under mandatory DD. Again, due to the low response rate these numbers
should be interpreted with caution. In addition, some of these respondents may have
added additional DD activities when giving their replies. The numbers should therefore
not be taken as proxies for activities exclusively related to environmental and climate
change DD.
Table 8.28: Respondents’ estimates for environmental and climate change due
diligence: person-days and costs
Total estimated person-
days (5 company
respondents)
Status
quo
Voluntary
guidelines
Mandatory
DD
reporting
Mandatory DD
throughout value
chains
1000+ employees
23 45 56
1000+ employees 12 12
12
50 – 249 employees
1000+ employees 2 436
250 - 500 employees 7
Total estimated annual Status Voluntary Mandatory Mandatory DD
417
costs in EUR (1 company
respondent)
quo guidelines DD
reporting
throughout value
chains
1000+ employees 23,000 56,000 45,000 78,000
Source: Business and Stakeholder Surveys.
Estimation of firm-level cost for EU businesses
Assumptions
The following estimations are based on person-day estimates provided by the
respondents to the business stakeholder survey. The person-day estimates reflect
companies additional labour costs compared to the status quo, i.e. no policy change. In
addition to internal labour cost, we also consider overhead and, based on estimates
given by the survey respondents, additional costs resulting from outsourced activities
such as external audits.
It should be noted that the person-day estimates provided by the respondents do not
fully account for future legal developments (unilateral measures) in the EU’s Member
States. The survey replies indicate that respondents did not account for potential
additional cost resulting from increased regulatory fragmentation in the EU. Generally,
divergence in regulatory frameworks across the EU causes additional costs for
businesses and impedes intra-EU trade and investment. For DD regulations, the costs of
the baseline scenario, i.e. no EU action, would imply considerable additional costs for
businesses that trade and/or invest across EU borders if the Member States would enact
national DD laws. Accordingly, it would be increasingly difficult for EU companies (who
operate different EU markets, as indicated by many survey respondents) to adapt to
different legal frameworks in different EU countries, resulting in increased costs. These
costs would also impact on the costs of other policy options. Since most EU Member
States have not yet adopted national DD laws, we only focus on the cost impact resulting
of the proposed policy options for the EU aggregate, i.e. we do not incorporate the cost
impact of increasing regulatory fragmentation within the EU. However, compared to fully
harmonised EU regulation we expect the additional cost to be significantly higher if
companies would have to comply with 28 national laws for which different DD obligations
and reporting requirements apply. Assuming that applicable DD obligations, e.g. on-site
visits, internal and external audits and mitigation activities, would largely be the same
for all 28 EU Member States, the additional cost would mainly result from compliance
with national reporting requirements. An EU Directive, i.e. mere minimum standards for
DD obligations for the Member States, would also result in additional cost for businesses.
An EU Directive would also bear the risk of gold-plating, i.e. over-implementation at
national level, which can result in additional costs for businesses.
The estimates presented below represent companies’ recurrent costs (over the long-
term). The survey respondents did not indicate initial costs (short-term costs), e.g. for
hiring staff, the set-up of IT solutions, or initial risk assessments. As outlined in the
literature review underlying this report, impact assessments of similar regulations (e.g.
the EU Conflict Minerals Regulation and the EU Non-financial Reporting Directive) provide
only rudimentary information about initial costs for certain activities or total initial costs.
For the EU’s Conflict Minerals Regulations, the total initial cost is estimated to amount to
13,500 EUR for companies affected by the regulation. For the EU’s Non-financial
418
Reporting Directive, initial “training” costs are estimated to amount to up to 5,000 EUR.
For comprehensive and thus far-reaching DD regulations, we expect the initial cost for
businesses to be higher, comprising of costs for staff, training, IT and initial risk
assessments conducted either internally or though external parties.
Due to the lack of available data, it is not possible to estimate these costs without having
to make highly simplified assumptions for businesses operating in different sectors,
companies with different business models and businesses of different sizes. Due to the
lack of data and the rather broad definition of the policy options, we do not provide
estimates for initial costs. However, these costs should be considered “investment” by
businesses to ensure the sustainable operation of the company itself as harm caused to
humans and the environment can result in reputational risk affecting the value of the
company. To ease the transitional financial burden for businesses, a phase-in period
should allow businesses enough flexibilities in terms of time and financial investment.
Once specific measures have been proposed by EU lawmakers, businesses should be
consulted regarding the length of transitional periods for large businesses and SMEs.
We provide a differentiated picture about the quantitative cost impacts at firm-level for
large companies (with more than 250 employees) and SMEs (with up to 249 employees).
Based on Eurostat data for the number of enterprises in the EU and size classes, we take
into account all EU-based businesses with
0-9 employees,
10-19 employees,
20-49 employees,
50-249 employees and
more than 250 employees (large businesses).
The quantifications are based on person-day estimates that were given by the business
stakeholder respondents (for an overview, see Table 8.31 and Table 8.32 below),
Eurostat data for the size, revenues and number of enterprises in the EU (according to
NACE classifications, level 1; see Table 8.29), and labour cost data provided by Eurostat
(see Table 8.30).
We take into account the following goods and services sectors for which reliable firm size
data and revenue data as well as the number of firms are provided by Eurostat: Mining
and quarrying; Manufacturing; Electricity, gas, steam and air conditioning supply;
Construction; Wholesale and retail trade; repair of motor vehicles and motorcycles;
Transportation and storage; Accommodation and food service activities; Information and
communication; Real estate activities, Professional, scientific and technical activities,
Administrative and support service activities. For sub-option 4.1, we also cover
companies that operate in mining and extraction industries, textile industries and
companies trading and manufacturing food products and agricultural commodities (at
NACE level 3). For the EU28, the number of companies by sector and size class is
outlined by Table 8.29.
419
Table 8.29: Number of enterprises in the EU28, by size class
Sector Number of
employees Eurostat classification
Number of
enterprises in
2016 (most
recent data)
B Mining and quarrying 0-9 Micro enterprise 14,752
B Mining and quarrying 10-19 Small enterprise 2,100
B Mining and quarrying 20-49 Small enterprise 1,400
B Mining and quarrying 50-249 Medium-sized enterprise 700
B Mining and quarrying GE250 Large enterprise 223
C Manufacturing 0-9 Micro enterprise 1,750,865
C Manufacturing 10-19 Small enterprise 171,346
C Manufacturing 20-49 Small enterprise 110,000
C Manufacturing 50-249 Medium-sized enterprise 71,921
C Manufacturing GE250 Large enterprise 16,100
D Electricity, gas, steam and air conditioning
supply
0-9 Micro enterprise 105,000
D Electricity, gas, steam and air conditioning
supply
10-19 Small enterprise 1,810
D Electricity, gas, steam and air conditioning
supply
20-49 Small enterprise 1,504
D Electricity, gas, steam and air conditioning
supply
50-249 Medium-sized enterprise 1,412
D Electricity, gas, steam and air conditioning
supply
GE250 Large enterprise 607
F Construction 0-9 Micro enterprise 3,307,408
F Construction 10-19 Small enterprise 130,928
F Construction 20-49 Small enterprise 54,817
F Construction 50-249 Medium-sized enterprise 17,511
F Construction GE250 Large enterprise 1,903
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
0_1 Micro enterprise 3,534,931
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
10-19 Small enterprise 242,458
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
2-9 Micro enterprise 2,367,119
420
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
20-49 Small enterprise 118,678
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
50-249 Medium-sized enterprise 45,376
G Wholesale and retail trade; repair of motor
vehicles and motorcycles
GE250 Large enterprise 7,848
H Transportation and storage 0_1 Micro enterprise 732,068
H Transportation and storage 10-19 Small enterprise 57,216
H Transportation and storage 2-9 Micro enterprise
H Transportation and storage 20-49 Small enterprise 37,000
H Transportation and storage 50-249 Medium-sized enterprise 18,300
H Transportation and storage GE250 Large enterprise 3,637
I Accommodation and food service activities 0_1 Micro enterprise 767,563
I Accommodation and food service activities 10-19 Small enterprise 140,000
I Accommodation and food service activities 2-9 Micro enterprise 1,008,888
I Accommodation and food service activities 20-49 Small enterprise 60,000
I Accommodation and food service activities 50-249 Medium-sized enterprise 16,915
I Accommodation and food service activities GE250 Large enterprise 1,966
J Information and communication 0_1 Micro enterprise 800,000
J Information and communication 10-19 Small enterprise
J Information and communication 2-9 Micro enterprise 290,000
J Information and communication 20-49 Small enterprise
J Information and communication 50-249 Medium-sized enterprise 11,831
J Information and communication GE250 Large enterprise 2,571
L Real estate activities 0_1 Micro enterprise 1,100,000
L Real estate activities 10-19 Small enterprise 17,178
L Real estate activities 2-9 Micro enterprise 329,351
L Real estate activities 20-49 Small enterprise 7,416
L Real estate activities 50-249 Medium-sized enterprise 3,345
L Real estate activities GE250 Large enterprise 600
M Professional, scientific and technical activities 0_1 Micro enterprise 3,387,499
421
M Professional, scientific and technical activities 10-19 Small enterprise 90,840
M Professional, scientific and technical activities 2-9 Micro enterprise 1,049,545
M Professional, scientific and technical activities 20-49 Small enterprise 41,000
M Professional, scientific and technical activities 50-249 Medium-sized enterprise 16,807
M Professional, scientific and technical activities GE250 Large enterprise 3,000
N Administrative and support service activities 0_1 Micro enterprise 1,029,442
N Administrative and support service activities 10-19 Small enterprise 57,692
N Administrative and support service activities 2-9 Micro enterprise 443,380
N Administrative and support service activities 20-49 Small enterprise 38,666
N Administrative and support service activities 50-249 Medium-sized enterprise 25,529
N Administrative and support service activities GE250 Large enterprise 6,940
Table 8.30: Labour costs per hour in EUR, annual data of 2018
European Union - 28 countries 27.4
Euro area (19 countries) 30.6
Belgium 39.7
Bulgaria 5.4
Czechia 12.6
Denmark 43.5
Germany (until 1990 former territory of the FRG) 34.6
Estonia 12.4
Ireland 32.1
Greece 16.1
Spain 21.4
France 35.8
Croatia 10.9
Italy 28.2
422
Cyprus 16.3
Latvia 9.3
Lithuania 9
Luxembourg 40.6
Hungary 9.2
Malta 14.7
Netherlands 35.9
Austria 34
Poland 10.1
Portugal 14.2
Romania 6.8
Slovenia 18.1
Slovakia 11.6
Finland 33.6
Sweden 36.6
United Kingdom 27.4
Source: Eurostat.
Note: This table contains data on Average hourly labour costs which are defined as total labour
costs divided by the corresponding number of hours worked by the yearly average number of
employees, expressed in full-time units. Labour costs cover wages and salaries and non-wage
costs (employers’ social contributions plus taxes less subsidies).
In related impact assessments, e.g. the EU Non-financial Reporting Directive and the EU
Conflict Minerals Regulations, cost estimates were also either taken from the companies’
replies gathered through consultations and surveys or estimated by multiplying a given
number of working hours (person-days) required (usually stated by the business
respondents) and labour costs per hour (usually based on available industry intelligence
or publicly available statistics), depending on the administrative procedures prescribed
by the intended regulation. We follow a similar methodology. Our estimations are based
on person-day estimates that were provided by business respondents. At the same time,
as outlined above, many business respondents did not indicate person-day or cost
estimates for certain DD activities. Many respondents indicated “No experience” with DD
activities. Accordingly, we consider replies from businesses that already conduct certain
DD activities most relevant. Of all businesses that provided estimates, the estimates
provided by the following groups of respondents are considered most relevant:
423
companies with 1,000+ employees that already conduct “Human rights due
diligence which takes into account all human rights (including environment)” and
companies with 50-1,000 employees that already conduct “Human rights due
diligence which takes into account all human rights (including environment)”.
We at the same time note that these person-day estimates should be interpreted with
caution (relevant remarks have also been made in the introductory part of this section):
In practice, the person-day requirements for information gathering and DD
activities vary considerably from company to company, depending on firm and
sector characteristics.
The policy options outlined to the survey respondents are defined in a very broad
way. Contrary to other legal proposals, the vague outline of potential DD-related
policies leaves a considerable scope of for interpretation and respondents’
expectations regarding the potential impacts.
Some respondents, e.g. CSR managers, may not have had the time to discuss
potential cost impacts internally, i.e. checking back with their HR and corporate
controlling departments.
Therefore, the estimations provided below should be taken as an indication of general
patterns and trends with respect to the escalation of legal obligations and different sizes
of companies. At the same time, as will be outlined below, the numbers stated by the
respondents are broadly in line with the findings of the impact assessment conducted for
related policy measures, e.g. the EU’s Non-financial Reporting Directive.
The following estimations are based on an approximation of the survey respondents’
estimates and firm-level revenue data provided by Eurostat.
Table 8.31 and Table 8.32 provide a generic (exemplary) overview of the methodology
applied to large companies with more than 250 employees and SMEs with up to 249
employees.
For all large companies with more than 250 employees, which are considered “large
companies” by Eurostat, we apply estimates that were given by the respondents from
companies with 1,000+ employees that already conduct “Human rights due diligence
which takes into account all human rights (including environment)” (Table 8.31).
These businesses turn out to be very large in terms of their annual revenues and can be
assumed to operate numerous complex value chains. The median annual revenue of
those companies the provided estimates is 11.5 billion EUR. To account for size effects
among large companies, we scaled the person-day estimates according to companies’
revenues, whereby we assume that the median value of the person-day estimates
provided by the respondents corresponds to their median revenue of 11.5 billion EUR.
According to the estimates provided by the respondents, we assume no change in the
required person-days from a shift from the “Status-quo” to “New voluntary
measures”.1371
As outlined in Table 8.31, the number of required person-days would increase
moderately from a policy shift from the “status-quo” to “New reporting requirements”
1371 As outlined above, the slight decrease in the number of required person-days for “New voluntary guidelines” results from
differences in the respondents: some respondents who proved estimates for the “Status quo” did not provide estimates for
“New voluntary guidelines” and vice versa (see Figure 8.3).
424
and substantially increase from a policy shift from the “status-quo” to “Mandatory DD
throughout companies’ value chains”. For the group of large companies, we assume the
change in required person-days to be proportional to the size of companies’ revenues.
We consider the size of revenue a more appropriate proxy for value chain
length/complexity than the number of employees.
To translate person-days to cost equivalents, we apply the average EU labour cost for a
person-day of 8 hours, i.e. 219.20 EUR (27.40 EUR per hour). It should be noted that
many large companies have their corporate headquarters and operations in multiple EU
and non-EU countries, in which wage levels are relatively high. These companies may
face higher labour costs than companies whose headquarters or operations are based in
low-wage Member States. The estimated costs resulting from person-day estimates and
country-specific labour costs, as outlined above, may therefore underestimate the
internal labour costs of companies that are headquartered in EU Member States where
salaries are relatively high (and vice versa).
Table 8.31: Firm-level cost based on revenues approximation: large companies
with more than 250 employees
Large companies with
more than 250 employees: revenue approximation
Baseline: empirical person-days, per month
Monthly person-days
Large companies with revenues of 11.5 billion EUR (empirical median)
Large companies with revenues of 1 billion EUR
Large companies
with revenues of 100 million EUR
Status quo 52 5 0.5
△ New voluntary guidelines no change no change no change
△ New reporting
requirements +17 +1 +0
△ Mandatory DD throughout
value chains +219 +19 +2
Annual person-day equivalents
Annual person-days Large companies with revenues of
11.5 billion EUR
Large companies with revenues of 1 billion EUR
Large companies with revenues of
100 million EUR
Status quo 624 54 5
△ New voluntary guidelines no change no change no change
△ New reporting
requirements +204 +18 +2
425
△ Mandatory DD throughout
value chains +2,628 +229 +23
Annual cost (based on EU average hourly labour cost of 27.40 EUR)
Annual cost equivalents Large companies with revenues of
11.5 billion EUR
Large companies with revenues of 1 billion EUR
Large companies with revenues of
100 million EUR
Status quo EUR 136,781
EUR 11,894
EUR 1,189
△ New voluntary guidelines no change no change no change
△ New reporting
requirements
EUR
+44,717
EUR
+3,888
EUR
+389
△ Mandatory DD throughout
value chains
EUR
+576,058
EUR
+50,092
EUR
+5,009
Source: Own approximations based on Business and Stakeholder Surveys.
For companies with up to 249 employees, which are considered “SMEs” (including micro
businesses) by Eurostat, we apply estimates that were given by the respondents from
companies with 50-1,000 employees that already conduct “Human rights due diligence
which takes into account all human rights (including environment)” (Table 8.32). We
applied the same methodology as for large companies. However, the revenues of
companies with 50-1,000 employees are much lower than those of companies with
1,000 employees. The median annual revenue of those companies the provided
estimates is 128 million EUR. To account for size effects among SMEs, we scaled the
person-day estimates according to companies’ revenues, whereby we assume that the
median value of the person-day estimates provided by the respondents from companies
with 50-1,000 employees corresponds to their median revenue of 128 million EUR.
According to the estimates provided by the respondents, we assume no significant
change in the required person-days from a shift from the “Status-quo” to “New voluntary
measures”.1372
Table 8.32: Firm-level cost based on revenues approximation: companies with
up to 249 employees
Companies with up to
249 employees: revenue approximation
Baseline: empirical person-days, per month
Monthly person-days Companies with revenues of 128
Companies with revenues of 10
Companies with revenues of 1
1372 As outlined above, the respondents only report a slight increase in the number of required person-days for “New voluntary
guidelines” (see Figure 8.4).
426
million EUR (empirical median)
million EUR million EUR
Status quo 35 3 0.3
△ New voluntary guidelines no change no change no change
△ New reporting
requirements +4 +0.3 +0.0
△ Mandatory DD throughout
value chains +36 +2.8 +0.3
Annual person-day equivalents
Annual person-days Companies with revenues of 128
million EUR
Companies with revenues of 10
million EUR
Companies with revenues of 1
million EUR
Status quo 420 33 3
△ New voluntary guidelines no change no change no change
△ New reporting
requirements +48 +4 +0.4
△ Mandatory DD throughout
value chains +432 +34 +3.4
Annual cost (based on EU average hourly labour cost of 27.4 EUR)
Annual cost equivalents Companies with revenues of 128
million EUR
Companies with revenues of 10
million EUR
Companies with revenues of 1
million EUR
Status quo EUR
92,064
EUR
7,193
EUR
719
△ New voluntary guidelines no change no change no change
△ New reporting
requirements EUR +10,522
EUR +822
EUR +82
△ Mandatory DD throughout
value chains EUR +94,694
EUR +7,398
EUR +740
Source: Own approximations based on Business and Stakeholder Surveys.
It should be noted that the applied methodology, which differentiates between large
companies and SMEs, has some limitations. Due to the lack of available data, the
methodology, i.e. the approximation, causes in a structural break in the estimates for
companies with revenues with more/less than 128 million EUR. Eurostat data is only
available for large companies with more than 250 employees and SMEs with up to 249
employees. Accordingly, the structural break affects some large companies (in terms of
employees) with relatively low revenues and some companies that have less than 250
427
employees, but relatively high revenues. At the same time, it should be noted that, due
to the implementation of efficient DD procedures, e.g. by use of modern tracking
technologies, some SMEs may face lower relative cost than large companies. The actual
impact depends on the complexity of the value chains and the scope for exploitation of
potential economies of scale, while large companies generally perform better in
exploiting potential economies of scale than SMEs.
However, we consider the numbers for smaller companies more appropriate than
assuming a linear relationship for all companies. First, applying the estimates that were
given by respondents from very large companies would result in very low, often
negligible results for many SMEs, particularly very small SMEs in terms of their annual
revenues. Second, accounting for a non-linear relationship between company size and
person-days requirements for large companies and SMEs recognises that large
companies benefit from economies of scale in various respects, e.g. a wide range of
existing DD activities, existing man-power specialised in value chain management,
existing technological solutions not available to SMEs. Our approximations indicate that,
compared to large companies, the cost-revenue ratio is 21 times higher for SME for new
reporting requirements and 15 times higher for SMEs for mandatory DD. These numbers
should not be taken by face value. These numbers are the result of our approximation
and reflect a general pattern. A company’s ability to benefit from economies of scale
critically depends on firm and sector characteristics.
At the same time, as concerns the additional recurrent firm-level costs as percentages of
companies’ revenues, these numbers could be interpreted as ad valorem tariff
equivalents (AVEs), which are relatively low compared to applied tariffs on goods imports
to the EU or exports from the EU (in 2017 the weighted mean average tariff of the EU
was 1.8%, while peak tariffs are substantially higher for certain product categories, e.g.
agricultural commodities). Nevertheless, for companies that would have to rearrange
their value chains and relocate certain production activities to countries/regions with
lower human rights and environmental risks, there would be an additional initial cost
burden (divestment in high-risk countries; investment in low-risks countries) that would
be substantially higher than the recurrent costs, which are mainly staff-driven.
The numbers of this estimation should also be put into perspective with estimates
outlined in the impact assessment of the EU Non-Financial Reporting Directive, which
finds that large companies’ additional annual costs amount to 155,000 and 604,000 EUR,
while SMEs additional cost are substantially lower, amounting to 8,000 and 25,000 EUR
(Table 0.1 of Part IV: Annexures). It should be noted that the “New reporting
requirements” would go beyond the reporting requirements of the Non-financial
Reporting Directive, while new “Mandatory DD” would add substantial additional
information and mitigation requirements to companies’ value chain management,
reporting and general DD activities, resulting in significantly higher additional costs.
Table 8.33: Additional firm-level cost as percentages of revenues, large
companies vs. SMEs
New voluntary guidelines
New reporting requirements
Mandatory DD throughout value
chains
Large companies (based
on revenues approximation; baseline:
no change 0.0004% 0.0050%
428
annual revenue of 11.5 billion EUR)
SMEs (based on revenues approximation; baseline: annual revenue of 128 billion EUR)
no change 0.0082% 0.0740%
Economies of scale factor large companies / SMEs
0.0473 0.0677
Economies of scale factor SMEs / large companies
21 15
Source: Own approximations based on Business and Stakeholder Surveys.
Taking into account the additional burden, we consider our results to be in line with the
findings of the impact assessment for the EU’s Non-financial Reporting Directive. For
mandatory DD, for example, our estimates indicate that a representative large company
with revenues of 10 billion EUR would face additional annual labour cost of
approximately 500,920 EUR. By comparison, for mandatory DD, our estimates indicate
that a representative SME with revenues of 1 million EUR would face additional annual
labour cost of approximately 740 EUR, while a large SME with annual revenues of 50
million EUR (the upper bound according the Eurostat SME definitions) would face
additional annual labour cost of 36,990 EUR (see Table 8.34).
The estimates nevertheless represent averages across companies from all sectors of the
economy. Depending on companies’ business model, value chain complexities and the
degree of internationalisation, the numbers can be substantially lower or higher for some
businesses. For example, depending on the final regulations the recurrent costs may be
much more significant for the financial sector than for other companies. This is because
of the financial sector’s role in financing and facilitating the economic activities of
companies in just about any other sector of the economy. Similarly, for companies that
are engaged in online intermediation (mainly for physical goods) or physical retail
services, the costs may also be more substantial than for companies that produce and
market only a low number of products and services, with a low number of
suppliers/business partners respectively.
Table 8.34: Overview of estimated additional labour cost excl. overhead and
cost of outsourced activities / audits, large companies vs. SMEs
Large companies
Revenue △ New voluntary
guidelines
△ New reporting
requirements
△ Mandatory DD
throughout value chains
EUR 50,000,000,000 no change EUR 194,420.87 EUR 2,504,598.26
EUR 10,000,000,000 no change EUR 38,884.17 EUR 500,919.65
429
EUR 1,000,000,000 no change EUR 3,888.42 EUR 50,091.97
EUR 100,000,000 no change EUR 388.84 EUR 5,009.20
SMEs
Revenue △ New voluntary
guidelines
△ New reporting
requirements
△ Mandatory DD
throughout value chains
EUR 50,000,000 no change EUR 4,110 EUR 36,990
EUR 25,000,000 no change EUR 2,055 EUR 18,495
EUR 10,000,000 no change EUR 822 EUR 7,398
EUR 1,000,000 no change EUR 82 EUR 740
Source: Own approximations based on Business and Stakeholder Surveys.
Table 8.35 outlines annual cost estimates including companies’ internal labour costs, the
costs of overhead and costs of “outsourced activities / audits”. We applied a 25% mark-
up for overhead relative to labour costs (expenses not related to direct labour, e.g. the
cost of office equipment, rent and personnel administration).1373 Empirical mark-ups for
“outsourced activities / audits” have been taken from the survey replies. For “New
reporting requirements”, we applied a 17% mark-up on the estimated additional labour
costs. For “Mandatory DD”, we applied a 25% mark-up on the estimated additional
labour costs (see Table 8.27).
Table 8.35: Overview of estimated additional labour cost incl. overhead and
cost of outsourced activities / audits, large companies vs. SMEs
Large companies
Revenue △ New voluntary
guidelines
△ New reporting
requirements
△ Mandatory DD
throughout value chains
EUR 50,000,000,000 no change EUR 345,097.04 EUR 4,696,121.74
EUR 10,000,000,000 no change EUR 69,019.41 EUR 939,224.35
EUR 1,000,000,000 no change EUR 6,901.94 EUR 93,922.43
EUR 100,000,000 no change EUR 690.19 EUR 9,392.24
SMEs
1373 Businesses have regular expenses that are not directly related to producing goods or services. These indirect costs are
termed "overhead". Most businesses calculate overhead costs on a monthly basis. Typically, overhead is expressed as a
percentage of sales or labour cost. The 25% mark-up is also applied in the EU’s Horizon funding programmes.
430
Revenue △ New voluntary
guidelines
△ New reporting
requirements
△ Mandatory DD
throughout value chains
EUR 50,000,000 no change EUR 7,295.25 EUR 69,356.25
EUR 25,000,000 no change EUR 3,647.63 EUR 34,678.13
EUR 10,000,000 no change EUR 1,459.05 EUR 13,871.25
EUR 1,000,000 no change EUR 145.91 EUR 1,387.13
Source: Own approximations based on Business and Stakeholder Surveys. Note: we applied a 25%
mark-up for overhead relative to labour costs. For “New reporting requirements”, we applied a 17% mark-up on the estimated additional labour costs. For “Mandatory DD”, we applied a 25% mark-up on the estimated additional labour costs (see Table 8.27).
Aggregate firm-level costs across policy options
For the EU as a whole, Table 8.36 provides an overview of the additional aggregate firm-
level cost that would result from the proposed policy option. The estimates are based on
the revenues of EU enterprises for different sectors and size classes, for which the data
is provided in Table 0.2 of Part IV: Annexures. The numbers represent total annual cost
estimates for large companies and SMEs. If new regulation would be applied horizontally
across the EU, EU companies’ additional cost would be highest for policy option 4
requiring “Mandatory DD throughout companies’ value chains”, amounting to about 33
billion EUR annually. For policy option 3 on “New reporting requirements”, EU companies’
additional aggregate cost would amount to about 3.5 billion EUR annually.
It should be noted that respondents’ data was not clear about the total costs of DD
activities resulting from checks and reporting activities concerning 1st-tier suppliers only
and whether these estimates also included other suppliers (suppliers of suppliers) along
their value chains. Accordingly, the numbers should be read as a lower-bound estimate.
On the other hand, companies that source from the same suppliers may be able to share
the costs in the future, e.g. by cooperating in risk assessments or through the purchase
of assessments by external audit providers, etc. These overlaps in business relations
could result in cost savings. The survey replies indicate that business respondents have
not taken into account such savings. This may have resulted in an overestimation of
companies’ additional recurrent costs.
It should also be noted that in an ideal world, if every (EU) business conducts its own
due diligence in accordance with the (EU) law, companies may only incur costs relating
to their own impacts and those of relationships outside of the EU. If an EU due diligence
law would reduce the practical scope of EU businesses’ due diligence activities once they
have done their risk assessment this would result in cost reductions.
Table 8.36: Estimated additional firm-level cost, EU aggregate
431
Labour cost Overhead
Cost of
outsourced
activities /
audits
Total
additional
annual firm-
level cost
Option 1: no policy
change (baseline
scenario)
no change no change no change no change
Option 2: new
voluntary guidelines
/ guidance
no change no change no change no change
Option 3: New
regulation requiring
due diligence
reporting
EUR
2,435,441,525
EUR
608,860,381
EUR
414,025,059
EUR
3,458,326,965
Option 4: New
regulation requiring
mandatory due
diligence as a legal
duty of care
EUR
22,028,160,401
EUR
5,507,040,100
EUR
5,507,040,100
EUR
33,042,240,602
Source: Own approximations based on Business and Stakeholder Surveys.
Company-level cost for Option 4: New regulation requiring mandatory DD as
legal duty of care
Sub-option 4.1: New regulation applying to a narrow category of business (limited by
sector)
Based on the clarifications with the client, we provide cost estimates for EU companies
that operate in mining and extraction industries, textile industries and companies trading
and manufacturing food products and agricultural commodities. A full list of sectors,
which are based on NACE 3 classifications, is provided by Table 8.37. Due to the very
high number of sectors and the required differentiation according to company size
categories, we only provide aggregate numbers for the EU28 broken down by the three
sectors (see Table 8.38). The numbers indicate that, because of its substantial size, the
EU’s food and agricultural sector would show the highest increase in costs resulting from
“New mandatory DD throughout companies’ value chains”.
As shown by Table 8.38, we estimate the total additional cost for EU companies
operating in the mining and extraction industries to amount to up to 42.3 million EUR
(6.2 million EUR for large companies and 36 million EUR for SMEs).
The total additional cost for EU companies operating in the textiles industries are
estimated to amount up to 110 million EUR per year (3.7 million EUR for large
companies and 107 million EUR for SMEs).
The total additional cost for EU companies that trade or manufacture of food products
and agricultural commodities amount to up to 2.3 billion EUR annually (56 million EUR
for large companies and 2.27 billion EUR for SMEs).
432
Table 8.37: Overview of sectors: mining and extraction industries, food
products and agricultural commodities, textile industries – NACE Level 3
Mining and extraction
industries
Total costs trade and
manufacturing of food
products and agricultural
commodities
Textile industries
B051 Mining of hard coal
C101 Processing and preserving
of meat and production of meat
products
C131 Preparation and spinning of textile
fibres
B051 Mining of hard coal
C101 Processing and preserving
of meat and production of meat
products
C131 Preparation and spinning of textile
fibres
B051 Mining of hard coal
C101 Processing and preserving
of meat and production of meat
products
C131 Preparation and spinning of textile
fibres
B051 Mining of hard coal
C101 Processing and preserving
of meat and production of meat
products
C131 Preparation and spinning of textile
fibres
B051 Mining of hard coal
C101 Processing and preserving
of meat and production of meat
products
C131 Preparation and spinning of textile
fibres
B052 Mining of lignite C102 Processing and preserving
of fish, crustaceans and molluscs C132 Weaving of textiles
B052 Mining of lignite C102 Processing and preserving
of fish, crustaceans and molluscs C132 Weaving of textiles
B052 Mining of lignite C102 Processing and preserving
of fish, crustaceans and molluscs C132 Weaving of textiles
B052 Mining of lignite C102 Processing and preserving
of fish, crustaceans and molluscs C132 Weaving of textiles
B052 Mining of lignite C102 Processing and preserving
of fish, crustaceans and molluscs C132 Weaving of textiles
B061 Extraction of crude
petroleum
C103 Processing and preserving
of fruit and vegetables C133 Finishing of textiles
B061 Extraction of crude
petroleum
C103 Processing and preserving
of fruit and vegetables C133 Finishing of textiles
B061 Extraction of crude
petroleum
C103 Processing and preserving
of fruit and vegetables C133 Finishing of textiles
B061 Extraction of crude
petroleum
C103 Processing and preserving
of fruit and vegetables C133 Finishing of textiles
B061 Extraction of crude C103 Processing and preserving C133 Finishing of textiles
433
Mining and extraction
industries
Total costs trade and
manufacturing of food
products and agricultural
commodities
Textile industries
petroleum of fruit and vegetables
B062 Extraction of natural gas C104 Manufacture of vegetable
and animal oils and fats C139 Manufacture of other textiles
B062 Extraction of natural gas C104 Manufacture of vegetable
and animal oils and fats C139 Manufacture of other textiles
B062 Extraction of natural gas C104 Manufacture of vegetable
and animal oils and fats C139 Manufacture of other textiles
B062 Extraction of natural gas C104 Manufacture of vegetable
and animal oils and fats C139 Manufacture of other textiles
B062 Extraction of natural gas C104 Manufacture of vegetable
and animal oils and fats C139 Manufacture of other textiles
B071 Mining of iron ores C105 Manufacture of dairy
products
C141 Manufacture of wearing apparel,
except fur apparel
B071 Mining of iron ores C105 Manufacture of dairy
products
C141 Manufacture of wearing apparel,
except fur apparel
B071 Mining of iron ores C105 Manufacture of dairy
products
C141 Manufacture of wearing apparel,
except fur apparel
B071 Mining of iron ores C105 Manufacture of dairy
products
C141 Manufacture of wearing apparel,
except fur apparel
B071 Mining of iron ores C105 Manufacture of dairy
products
C141 Manufacture of wearing apparel,
except fur apparel
B072 Mining of non-ferrous
metal ores
C106 Manufacture of grain mill
products, starches and starch
products
C142 Manufacture of articles of fur
B072 Mining of non-ferrous
metal ores
C106 Manufacture of grain mill
products, starches and starch
products
C142 Manufacture of articles of fur
B072 Mining of non-ferrous
metal ores
C106 Manufacture of grain mill
products, starches and starch
products
C142 Manufacture of articles of fur
B072 Mining of non-ferrous
metal ores
C106 Manufacture of grain mill
products, starches and starch
products
C142 Manufacture of articles of fur
B072 Mining of non-ferrous
metal ores
C106 Manufacture of grain mill
products, starches and starch
products
C142 Manufacture of articles of fur
434
Mining and extraction
industries
Total costs trade and
manufacturing of food
products and agricultural
commodities
Textile industries
B081 Quarrying of stone, sand
and clay
C107 Manufacture of bakery and
farinaceous products
C143 Manufacture of knitted and
crocheted apparel
B081 Quarrying of stone, sand
and clay
C107 Manufacture of bakery and
farinaceous products
C143 Manufacture of knitted and
crocheted apparel
B081 Quarrying of stone, sand
and clay
C107 Manufacture of bakery and
farinaceous products
C143 Manufacture of knitted and
crocheted apparel
B081 Quarrying of stone, sand
and clay
C107 Manufacture of bakery and
farinaceous products
C143 Manufacture of knitted and
crocheted apparel
B081 Quarrying of stone, sand
and clay
C107 Manufacture of bakery and
farinaceous products
C143 Manufacture of knitted and
crocheted apparel
B089 Mining and quarrying
n.e.c.
C108 Manufacture of other food
products
C151 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery and harness; dressing and
dyeing of fur
B089 Mining and quarrying
n.e.c.
C108 Manufacture of other food
products
C151 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery and harness; dressing and
dyeing of fur
B089 Mining and quarrying
n.e.c.
C108 Manufacture of other food
products
C151 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery and harness; dressing and
dyeing of fur
B089 Mining and quarrying
n.e.c.
C108 Manufacture of other food
products
C151 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery and harness; dressing and
dyeing of fur
B089 Mining and quarrying
n.e.c.
C108 Manufacture of other food
products
C151 Tanning and dressing of leather;
manufacture of luggage, handbags,
saddlery and harness; dressing and
dyeing of fur
B091 Support activities for
petroleum and natural gas
extraction
C109 Manufacture of prepared
animal feeds C152 Manufacture of footwear
B091 Support activities for
petroleum and natural gas
extraction
C109 Manufacture of prepared
animal feeds C152 Manufacture of footwear
B091 Support activities for
petroleum and natural gas
extraction
C109 Manufacture of prepared
animal feeds C152 Manufacture of footwear
435
Mining and extraction
industries
Total costs trade and
manufacturing of food
products and agricultural
commodities
Textile industries
B091 Support activities for
petroleum and natural gas
extraction
C109 Manufacture of prepared
animal feeds C152 Manufacture of footwear
B091 Support activities for
petroleum and natural gas
extraction
C109 Manufacture of prepared
animal feeds C152 Manufacture of footwear
B099 Support activities for
other mining and quarrying C110 Manufacture of beverages
B099 Support activities for
other mining and quarrying C110 Manufacture of beverages
B099 Support activities for
other mining and quarrying C110 Manufacture of beverages
B099 Support activities for
other mining and quarrying C110 Manufacture of beverages
B099 Support activities for
other mining and quarrying C110 Manufacture of beverages
C120 Manufacture of tobacco
products
C120 Manufacture of tobacco
products
C120 Manufacture of tobacco
products
C120 Manufacture of tobacco
products
C120 Manufacture of tobacco
products
G462 Wholesale of agricultural
raw materials and live animals
G462 Wholesale of agricultural
raw materials and live animals
G462 Wholesale of agricultural
raw materials and live animals
G462 Wholesale of agricultural
raw materials and live animals
G462 Wholesale of agricultural
436
Mining and extraction
industries
Total costs trade and
manufacturing of food
products and agricultural
commodities
Textile industries
raw materials and live animals
G462 Wholesale of agricultural
raw materials and live animals
G463 Wholesale of food,
beverages and tobacco
G463 Wholesale of food,
beverages and tobacco
G463 Wholesale of food,
beverages and tobacco
G463 Wholesale of food,
beverages and tobacco
G463 Wholesale of food,
beverages and tobacco
G463 Wholesale of food,
beverages and tobacco
G472 Retail sale of food,
beverages and tobacco in
specialised stores
G472 Retail sale of food,
beverages and tobacco in
specialised stores
G472 Retail sale of food,
beverages and tobacco in
specialised stores
G472 Retail sale of food,
beverages and tobacco in
specialised stores
G472 Retail sale of food,
beverages and tobacco in
specialised stores
G472 Retail sale of food,
beverages and tobacco in
specialised stores
Source: Own selection based on Eurostat classifications.
Table 8.38: Total of annual firm-level costs for Sub-option 4.1: mining and
extraction industries, food products and agricultural commodities, textile
industries, EU aggregates
437
Sector Labour cost Overhead
Cost of outsourced
activities / audits
Total additional
annual firm-
level cost
Large companies
Mining and extraction
EUR 4,401,321
EUR 1,100,330
EUR 748,224
EUR 6,249,875
Textiles EUR 2,452,523
EUR 613,131
EUR 613,131
EUR 3,678,784
Trade and manufacturing of food products and
agricultural commodities
EUR 39,476,090
EUR 9,869,023
EUR 6,710,935
EUR 56,056,048
SMEs
Mining and
extraction
EUR
24,007,028
EUR
6,001,757
EUR
6,001,757
EUR
36,010,542
Textiles EUR 75,188,093
EUR 18,797,023
EUR 12,781,976
EUR 106,767,093
Trade and manufacturing of food products and agricultural commodities
EUR 1,514,112,336
EUR 378,528,084
EUR 378,528,084
EUR 2,271,168,504
TOTAL
EUR 1,659,637,390
EUR 414,909,348
EUR 405,384,107
EUR 2,479,930,845
Source: Own calculations based on Business and Stakeholder Surveys. Note: we applied a 25% mark-up for overhead relative to labour costs. For “New reporting requirements”, we applied a 17% mark-up on the estimated additional labour costs. For “Mandatory DD”, we applied a 25% mark-up on the estimated additional labour costs (see Table 8.27).
Sub-option 4.2: New regulation applying horizontally across sectors
Sub-option 4.2(a): applying only to a defined set of large companies
Large companies’ additional cost would be highest for policy option 4 requiring
“Mandatory DD throughout companies’ value chains”, amounting to about 543 million
EUR. For policy option 3 on “New reporting requirements”, EU companies’ additional
aggregate cost would amount to about 40 million EUR annually (see also Table 8.36).
Sub-option 4.2(b): applying to all business, including SMEs
438
If new regulation would be applied horizontally across the EU, EU companies’ additional
cost would be highest for policy option 4 requiring “Mandatory DD throughout
companies’ value chains”, amounting to about 33 billion EUR annually. For policy option
3 on “New reporting requirements”, EU companies’ additional aggregate cost would
amount to about 3.5 billion EUR annually (see also Table 8.36).
It should be noted that SMEs costs could disproportionately rise, particularly for small
companies operating in retail and wholesale trading or the manufacturing sector as these
sectors that are generally characterised by complex and often international value chains.
In addition, compared to larger companies a reputation-based increase in SMEs total
sales is less likely to generate additional income sufficient to cover additional costs that
result from new DD requirements.
However, as the findings from elsewhere in this study show, due diligence as a standard
of care relatesto what could be reasonably expected of the company in its particular
circumstances, risks and operating context. In this way, courts or regulators would take
into account what could be reasonably expected of SMEs with small profit margins and
low or indirect risks, taking into account the nature of the risks and the SME’s leverage
efforts. The literature relating to disclosure requirements, which arguably impose
disproportionate costs burdens on SMEs who are required to produce reports of similar
length and detail as large companies, discuss the risks of SMEs suffering costs and even
being drive out of business as a result of transparency regulations. In contrast, the
analysis elsewhere in this study imply that a correct application of due diligence as a
standard of care should not expect the average micro business to undertake such
disproportionately burdensome activity that it drives them out of business. Nevertheless,
the introduction of a standard of care may have some impact on the closure of micro
companies which have severe risks of their own, or in their value chain which it cannot
address through exercising leverage.
The impacts on competitiveness, trade and innovation
The impact on EU companies’ competitiveness is difficult to assess ex-ante. Generally, as
concerns EU companies’ competitiveness within the Single Market, the impact critically
depends on whether non-EU companies operating in the EU are affected by the
regulations, or whether they are carved-out. If EU DD regulation would only apply for
companies that are based in the EU, EU companies would be at a relative disadvantage
compared to non-EU importers of goods and services that do not have to comply with
any form of DD regulation. Non-EU companies would benefit from relative cost
advantages vis-à-vis EU-based companies. Non-EU companies would neither have to
bear the recurrent costs for DD activities not the initial cost for investment in staff and IT
and/or the relocation of certain production activities to low-risk countries/regions.
Accordingly, the least distortions of competition within the EU’s Single Market can be
expected from a mix of policies that equally affect all companies that operate in the EU.
As concerns EU companies’ international cost competitiveness, higher administrative
costs and greater legal risks/uncertainties generally decrease EU businesses’
competitiveness. If non-EU countries would abstain from the implementation of DD laws,
negative impacts for EU businesses would mainly result from policy options 3 and 4. The
negative impacts would be highest for policy option 4, which implies the highest
administrative cost and at the same time high legal risks, e.g. the risk of sanctions in
439
case of unforeseen (unexpected) human rights infringements in the value chain, which
may require a relocation of production activities away from high-risk countries.
EU exports, EU imports and EU investment in non-EU countries
As concerns EU trade flows, we do not expect significant negative distortions for EU
exporters that result from increased recurrent administrative cost. Expressed in ad
valorem tariff equivalents (AVEs, additional firm-level costs as percentages of
companies’ revenues), the numbers are relatively low (<0.1%) compared to, for
example, the applied average tariff for goods imported to the EU (in 2017 the weighted
mean average tariff of the EU was 1.8%). However, we note that our estimates do not
include cost for policy-induced rearrangements of companies’ value chains, which can be
substantial, particularly for with vast production facilities, e.g. manufacturing companies
that either operate their own plants or entered into supply agreements with suppliers in
high-risk countries. The costs of rearranging value chains and/or the relocation of
production would have a negative impact on the international competitiveness of EU
exporters. In some cases, a one-time rearrangement/relocation may translate to higher
recurrent costs, e.g. when production is relocated to countries/regions with higher
wages, higher costs for energy or higher taxes. Increases in recurrent costs would
adversely impact on EU companies’ medium-to long-term export competitiveness,
particularly those companies that import large amount of intermediate products/inputs
from low-cost, incl. low-wage, jurisdictions.
Regarding EU imports and EU businesses’ investment (FDI) in non-EU countries, some
internationally operating companies may have to entirely withdraw from non-EU markets
that are relatively risky with respect to human rights and environmental risks and high
monitoring and mitigation costs respectively (full disengagement). At the same time, it
should be noted that the UNGPs expressly state that DD does not necessarily imply a
termination the relationship or leaving the jurisdiction, as this might have negative
impacts on the respective regions. Instead, the businesses should exercise leverage to
try and improve conditions. In certain cases, it will not be possible to improve, but only if
the business was already so harmful that the company cannot have relationships with it
anymore, and cannot do anything else about it. This is a last resort and an extreme
example, literally described as such by the UNGPs. Accordingly, “forced disengagement”
would not be the intended outcome of an EU DD law. Instead, the impact of the law
should be to force companies to improve their conditions. If the law applies to the
company’s global operations, it will in any event not be able to just move elsewhere, as
there will be other problems there.
It is not possible to make any precise projections about the number/rate of companies’
withdrawals for certain countries and/or industries. Depending on the precise text of the
DD obligations, individual companies would have to assess and mitigate risks throughout
their operations. These operations, however, take place in countries whose formal and
informal institutions are not likely to change in the short-term (e.g. forced labour, unsafe
or unhealthy working conditions; discrimination by race, age, gender, sexuality and
other protected attributes; underpayment for labour), potentially requiring companies’ to
reconsider their engagements. Thereby, the rate of withdrawal is likely to be higher for
countries that are known for considerably high human rights risks. Table 8.39
exemplarily outlines the bottom-30 countries with the highest human rights risks (as of
2017) and the 2018 value of EU28 goods imports from these countries. It should be
noted that, depending on the precise legal provisions, EU exporters (downstream
440
business partners/customers) as well as investors (most likely FDI engagements) could
also be affected by a new EU DD regulation.
Lessons from existing instruments
It should be noted that there is only very limited evidence for the impact of related
instruments on trade flows between the EU and non-EU countries. There is no evidence
so far that the EU’s Non-financial Reporting Directive had an impact on trade flows
between the EU and third countries. The impacts of the EU Conflict Minerals Regulations
remain to be seen. At the same time, for the US Conflict Minerals Regulation recent
evidence suggests that the US regulation led to a significant reduction in the number of
conflict mines for the 3T minerals in Eastern Congo (Democratic Republic of Congo).1374
Also, beyond the four conflict minerals (gold, tin, tantalum, tungsten), EU imports of
mining products and non-ferrous metals from the Democratic Republic of Congo
increased strongly after 2015.1375 On aggregate, exports of metals and mineral products
from the Democratic Republic of Congo also increased significantly since 2013, e.g.
cobalt, copper, cobalt ore, copper ore). These developments show that there can be a
reallocation of resources in countries with high human rights risks, which, over time,
may lead to more production and exports in other sectors of the economy. It should be
noted, however, that these effects are different and less likely to take place for sectors
where international competition is already strong. For natural resources, the comparative
advantage of resource-rich countries is unlikely to erode if international supply remains
limited and international demand remains strong.
Table 8.39 Top 30 of countries with greatest human rights risks and EU28 import volumes
Country Human Rights Protection Scores (by Christopher Farris and Keith Schnakenberg)
Total goods import to the EU28, in million EUR
(EURO)
Thailand (1.209) 22,859
Ukraine (1.219) 18,017
Russia (1.232) 168,273
Congo (1.286) 866
China (1.299) 394,819
Iran (1.378) 9,453
India (1.394) 45,829
Bangladesh (1.423) 17,850
Mexico (1.423) 26,029
1374 Enoughproject (2018), Progress and Challenges on Conflict Minerals: Facts on Dodd-Frank 1502. Available at
https://enoughproject.org/special-topics/progress-and-challenges-conflict-minerals-facts-dodd-frank-1502. 1375 European Commission (2019). European Union, Trade in goods with Congo (Democratic Rep). Available at
https://webgate.ec.europa.eu/isdb_results/factsheets/country/details_congo-democratic-rep_en.pdf.
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Venezuela (1.435) 1,688
Egypt (1.536) 8,503
Pakistan (1.581) 6,882
Burundi (1.595) 25
Turkey (1.620) 76,141
Somalia (1.739) 24
Ethiopia (1.950) 652
Eritrea (1.964) 2
Libya (1.976) 16,786
Central African Republic (2.057) 14
Nigeria (2.059) 22,546
Yemen (2.108) 40
Philippines (2.131) 7,936
Afghanistan (2.311) 28
Iraq (2.388) 16,353
Democratic Republic of Congo (2.431) 1,487
North Korea (2.438) 3
Myanmar (2.467) 2,295
Sudan (2.471) 154
Syria (2.559) 107
South Sudan (2.592) 0
Source: European Commission (trade volumes) and Harvard Dataverse (human rights protection scores)1376
EU companies might also be replaced by companies that do not have to comply with DD
regulations, even though some of these companies pose a higher risk of human rights
infringements than EU-based companies. As concerns sectors with relatively high human
rights risks, we acknowledge that certain industries are frequently in the limelight of civil
society and the political debate, e.g. mining, textiles and agriculture. However, we
recognise that human rights infringements are not only common in these sectors, with
numerous blind spots. Poor working conditions, for example, are also common in
1376 See Schnakenberg, K. E. & Fariss, C. J. (2014). Dynamic Patterns of Human Rights Practices. Political Science Research
and Methods, 2(1), 1–31. doi:10.1017/psrm.2013.15 Fariss, C. J. (2019). Yes, Human Rights Practices Are Improving Over
Time. American Political Science Review. Data vailable at
https://dataverse.harvard.edu/dataset.xhtml?persistentId=doi:10.7910/DVN/TADPGE.
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constructions sectors. A replacement of EU construction businesses operating in African
countries by Chinese or Indian competitors may thus result in a worse human rights
situation compared to the status quo.
Impact on production and employment in the Single Market
The disengagement effect might have a positive impact on the creation of value added
(production) and employment in the EU’s Single Market. In addition to direct
employment effects resulting from businesses’ need to comply with new DD regulations
(see FTE estimates outlined in Table 8.56), the relocation of investment to the EU and/or
sourcing of inputs to suppliers based in the EU would lead to greater levels of production
and employment respectively.
Precise quantitative impacts are, however, difficult to project as they depend on
numerous determinants, e.g. different company-specific characteristics, businesses’
operations in high-risk jurisdictions, but also EU countries’ relative attractiveness for
investment in certain sectors of the economy (labour-intensive, vs. knowledge-intensive,
energy-intensive), and, after all, the nature of the obligations set out in DD regulations.
Generally, Central and Eastern European (CEE) countries are more likely to benefit from
relocation effects. This is due to their relative wage competitiveness vis-à-vis Western
European countries and the fact the there is a greater potential for relocation of labour-
intensive activities and activities conducted by relatively low-skilled workers.
SMEs and businesses with low profit margins
Due to size advantages, large companies are more likely to remain competitive as the
additional cost burden accounts for a much smaller relative share in these companies’
total costs. A reputation-induced increase in the sales volumes of larger companies may
generate sufficient income to cover the cost of tighter DD regulations. It should be noted
that large companies are more likely to see a financial net benefit from reputation-
induced increases in sales. Due to their size, a reputation-based increase in total sales is
more likely to generate additional income sufficient to cover the additional costs that
result from new DD requirements. At the same time, companies with relatively low
annual revenues might not be able to compensate higher costs through reputation-
induced increases in sales and net income respectively. Moreover, companies with low
profit margins would face the risk of being driven out of business as the reputation-
induced increase in sales might not generate income sufficient to cover the additional
regulation-induced cost burden.
By contrast small companies with low profit margins are more likely to be driven out of
business than large companies with low profit margins. Small companies generally find it
harder to cover the costs resulting from additional human and administrative resources
that are needed to comply with DD regulations. At the same time, as concerns DD
obligations, small businesses’ burden will entirely depend on the risks of the company. It
should also be noted that due diligence is a standard that is based on what could be
reasonably expected of the company. The costs for individual SMEs may be lower if they
already have established DD practices in place for human rights and environmental
impacts.
DD includes a prioritisation exercise based on severity of risks, and acknowledges that
SMEs have limited resources. An application whereby a micro business is expected to
undertake disproportionately burdensome activities that these activities drive it out of
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business, would not be a correct interpretation of the standard. The introduction of a
standard of care may have some impact on the closure of micro companies which have
very severe risks which it cannot address through exercising leverage. Finally, if all
companies in the supply chain were to exercise appropriate due diligence, SMEs’ costs
would be significantly lower as they would mainly need to focus on their own risks.
Factors contributing to greater level of competitiveness include advantages in attracting
and retaining employees, greater consumer loyalty, less operational delays, less
problematic relations with governments and local communities, and less reputational
risks and damages. While it is generally difficult to quantify changes in companies’
relative competitiveness, it can be assumed that companies with DD activities in place
are more likely to enjoy these benefits. At the same time, the relative size of these
benefits vis-à-vis companies without DD procedures in place would erode over time if DD
would become mandatory by law.
Recent studies indicate that the globalisation of business and investment activities has
increased the demand for more transparent accounting of corporate responsibilities
encompassing human rights, social, economic and environmental dimensions. While this
trend mainly affects (large) internationally operating companies, a non-level-playing field
for businesses of all sizes, incl. SMEs, would still create distortions of competition as
companies based in certain jurisdictions would have to comply with DD policies while
companies based outside these jurisdictions (e.g. mere importers) would not necessarily
be affected be such regulations.
According to the replies of the survey respondents, the greatest number of businesses
expecting significant benefits (16%) or very significant benefits (24%) is recorded for
Mandatory DD policies compared to New voluntary guidelines and New reporting
requirements (see Table 8.40). The outcome suggests that businesses indeed anticipate
adverse impacts on their competitiveness due to new DD policies, but at the same time
expect least distortions if new EU regulation creates more equal standards for EU & non-
EU suppliers. It should also be noted that the percentage share of business respondents
expecting significant or very significant benefits is substantially larger for Mandatory DD
than for New Reporting requirements and new voluntary guidelines respectively.
Table 8.40 Respondents’ replies regarding distortion of competition due to
more equal standards for EU & non-EU suppliers
No
benefits
Some
benefits
Moderate
benefits
Significant
benefits
Very
significant
benefits
Do not
know
Option 2:
New voluntary
guidelines
Less distortion
of competition
due to more
equal
standards for
EU & non-EU
suppliers
28.26% 14.13% 20.65% 13.04% 6.52% 17.39%
Change in
percentage
points: Option
3 vs. Option 2
-0.35% -2.50% 2.61% 5.56% -0.71% -4.60%
Option 3: Less distortion
of competition
27.91% 11.63% 23.26% 18.60% 5.81% 12.79%
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New reporting
requirements
due to more
equal
standards for
EU & non-EU
suppliers
Change in
percentage
points: Option
34 vs. Option
2
-8.75% -3.15% -1.14% 2.81% 17.87% -7.63%
Option 4:
Mandatory DD
Less distortion
of competition
due to more
equal
standards for
EU & non-EU
suppliers
19.51% 10.98% 19.51% 15.85% 24.39% 9.76%
It should also be noted that stakeholders have indicated various disadvantages which
they experience from current lack of regulation in terms of the status quo, which they
expect to improve if a general duty is introduced at EU level. These benefits relate to an
improvement in competiveness through the levelling of the playing field so that
competitors, peers, suppliers and third parties will be subjected to the same standard, as
well as increasing leverage with third parties in the value chain through the introduction
of a non-negotiable standard. For example, companies have indicated that they are
currently struggling to achieve effective results due to having small market shares in
certain countries, or buying only a small percentage of the products produced by a
specific supplier. If a large number of the other buyers were subject to the same due
diligence standards, the effectiveness of their efforts would increase significantly,
improving their competiveness and potentially reducing their existing costs. These
benefits are difficult to quantify, but should be borne in mind, given that they could be
significant, and were raised by business stakeholders as one of the most important
reasons for the introduction of a mandatory due diligence requirement.
Innovation
The impacts on innovation are difficult to assess ex ante. As concerns companies’ overall
innovative capacities, higher costs generally tie up financial resources, which cannot be
spent on technological research and development or business model development. As a
result, companies that have to comply with tight due diligence regulations might suffer
from lower levels of innovation compared to competitors that do not have to comply with
these regulations, with adverse implications for companies’ medium- to long-term
competitiveness.
However, there may also be opposite impacts on companies’ innovative capacities. While
the impact of new DD policies on new technologies and business processes is limited,
new DD regulation might transform companies’ value chain management procedures and
potentially increase the adoption of cost-efficient tracking and surveillance technologies.
Some authors argue that sustainability measures can have an impact on a company’s
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operational efficiency and innovation.1377 Accordingly, sustainability measures can
provide opportunities for innovations as they can lead to the creation of new, more
ecological products or new processes and logistics solutions.
Trying to produce more environmental and socially friendly can help to find new
solutions and improve existing or invent new products. A consulting report found, for
example, examining strategic decisions based on the criterion of sustainability that truly
innovative companies have put sustainability at the heart of their business.1378 It is,
furthermore, explained that sustainability-driven innovation is about improving business
operations and processes to become more efficient and reduce costs, but it is also about
insulating a business from the risk of resource price shocks and shortages, which can all
together provide significant economic benefits.1379 Similarly, other authors studied the
sustainability initiatives of 30 large corporations and found that “sustainability is a
mother lode of organizational and technological innovations that yield both bottom-line
and top-line returns”.1380 The authors argue that companies which aim to meet emerging
norms and more stringent future environmental requirements gain time to experiment
with materials, technologies, and processes.
The impacts of new technology solutions on the costs of due diligence
Digitalisation and new technology tools hold the potential to provide unprecedented
solutions to identify, address and eliminate human rights infringements and
environmental challenges. As outlined in the company-level impact assessment,
companies of all sizes would face substantial additional costs related to compliance with
more comprehensive mandatory DD regulations, particularly full human rights DD
throughout companies’ value chains. Costs related to the collection of information, e.g.
audits conducted either through companies own employees or external services
suppliers, are among the highest cost factors for companies.
Emerging tracking and software solutions hold the potential to decrease companies’
costs substantially when it comes to accounting for human and environmental rights in
company operations and along global value chains. The survey responses indicate that
cost savings resulting from new technological advancements have not been taken into
consideration by the vast majority of the respondents.
As outlined by the World Business Council for Sustainable Development, “[n]ew
technologies [can] enable companies and other stakeholders to receive information that
indicates the violation of people’s land property, whether products come from verified
suppliers, or if health and safety standards are being respected. Satellites, drones,
balloons and other aerial vehicles can monitor land, natural ecosystems, movement of
materials and products from origin to points of sale. Smart sensors, like radio-frequency
identification (RFID) and smart dust are small to microscopic wireless technologies used
1377 E.g. Eccles and Serafeim argue that including ESG issues in their sustainability framework leads to cost savings for
companies through innovation, resource efficiency, and revenue enhancements due to sustainable products. Eccles, R. G., and
Serafeim, G. (2013). The performance frontier: Innovating for a sustainable strategy. Harvard Business Review, May 2013, 50-
60. Available at https://hbr.org/2013/05/the-performance-frontier-innovating-for-a-sustainable-strategy. 1378 Deloitte (2012). Sustainability for consumer business companies. A story of growth. Available at
https://www2.deloitte.com/hr/en/pages/consumer-business/articles/sustainability-for-consumer-business-companies.html. 1379 Capozucca, P. and Sarni, W. (2012). Sustainability 2.0 - Using sustainability to drive business innovation and growth.
Available at: https://www2.deloitte.com/us/en/insights/deloitte-review/issue-10/sustainability-2-0-innovation-and-growth-
through-sustainability.html 1380 Nidumolu, R., Prahalad, C.K. and Rangaswami, M.R.(2009). Why Sustainability Is Now the Key Driver of Innovation.
Harvard Business Review, September 2019. Available at: https://hbr.org/2009/09/why-sustainability-is-now-the-key-driver-of-
innovation.
446
to tag items with unique identification, gather data on materials, physical environment
and natural ecosystems or simply track and trace materials and/or products (often
without requiring human intervention on the ground).”1381
WBCSD highlights a number of examples for how new technologies can retrieve DD-
relevant information from workers, suppliers and other stakeholders. The food products
company Unilever, for example, reports to use “technology to get closer to the reality of
the situation for workers on the ground or to improve the traceability and transparency
of our supply chain.”1382
For example, the Responsible Labor Initiative (RBA), a multi-industry, multi-stakeholder
initiative that is, amongst others, supported by many large multinational companies,
uses mobile technology for worker surveys, training and helplines.1383 According to RBA,
it “has been at the forefront of addressing forced labor through the application of
advanced due diligence standards, tools and programs in the global supply chains of its
members.”1384 At the same time, they stress that “in order to accelerate change, this due
diligence must be harmonized across multiple industries that share recruitment supply
chains to drive labor market transformation through collective action. To catalyze this,
the RBA launched the Responsible Labor Initiative (RLI), a multi-industry, multi-
stakeholder initiative focused on ensuring that the rights of workers vulnerable to forced
labour in global supply chains are consistently respected and promoted.”
Microsoft, a member of RBA, combines a digital platform technology and other processes
to build “foundational systems to ensure accountability and efficiencies in Microsoft’s
programs. Investments in technology solutions such as the Audit Management System,
SEA Academy, and customized dash-boards enable strategies, process efficiencies, and
insights to meet its sustainability objectives. These solutions empower business decision
makers to consume real-time information and make optimal sustainability-related
decisions. Interacting with partners through Microsoft’s technology platforms also builds
cross-team trust and a shared understanding of information.
Similarly, Dell “utilized a mobile training platform as research revealed it can be difficult
for suppliers to pull large groups of people off the manufacturing floor for training, yet
80 percent of workers in its suppliers’ factories use mobile phones. Because mobile-
based training is delivered directly to workers, it is cost-effective for suppliers and easy
for Dell to scale globally.1385
Tracking technologies for physical goods, such as raw materials, but also intermediate
and final products, might become an essential component of DD processes in the future.
Without making references to human rights DD obligations, several studies on supply
chain management already report a great potential for tracking technologies and “Big
Data” analysis in the supply chain and logistics management. Indeed, many industries
1381 wbcsd.2018. Is technology a game-changer for human rights in corporate value chains? 27 November 2019. World
Business Council for Sustainable Development, Geneva. Available at https://www.wbcsd.org/Overview/Panorama/Articles/Is-
technology-a-game-changer-for-human-rights-in-corporate-value-chains. 1382 Unilever Human Rights Progress Report. 2017. Available at https://www.unilever.com/Images/human-rights-progress-
report_tcm244-513973_en.pdf. 1383 RBA is the world’s largest industry coalition dedicated to corporate social responsibility in global supply chains. RBA aims to
achieve a global electronics industry that creates sustainable value for workers, the environment and business. Its members, suppliers and stakeholders collaborate to improve working and environmental conditions through leading standards and
practices. 1384 RBA (2019), Promoting the rights of workers vulnerable to forced labor globally, article by Bob Mitchell, accessed
at http://www.responsiblebusiness.org/initiatives/rli/ 1385 RBA 2018. RBA Compass Awards 2018. Available at http://www.responsiblebusiness.org/publications/rba-compass-
awards-case-studies-2018/.
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already show increasing investments in these technologies, e.g. big data and blockchain
tools.1386
It should be noted that these investments are still generally driven by traditional
business demands such as sales, inventory and operations planning and not yet by
human rights or environmental DD considerations or policy requirements respectively.
Regarding the potential of new tracking technologies, for example, a study
commissioned by the European Commission (2015) reports that “numerous drivers are
fuelling the growth of advanced tracking systems […].” The authors also stress that “the
cost of implementing the systems have shrunk in the last years and have become
affordable for most companies. These costs were pushed down by another driver: the
harmonisation of standards across the field.”1387
On current trend, companies still mainly aim to streamline their operations to achieve
cost savings along their value chains. Arviem, a technology tracking and software
technology provider, for example, reports that supply chain inefficiencies are very costly
to businesses, which still rely on “a large amount of point-to-point communication with
outdated processes that are heavily dependent on email and phone communication. It
involves controlling and monitoring a product’s flow from the procurement of raw
materials to the distribution of the final product to the end user.” They also state that
“[d]espite the availability of several technological solutions, many companies still lack
end to end visibility to their entire supply chain. This is due to the silos existing between
people, processes and technology. This leads to inefficiencies as the supply chain is
slowed down by the large and complex network of point-to-point communications.”1388
They published two White Papers on supply chain visibility in the chemical and food
products industries, which present supply chain visibility solutions and cargo tracking
and monitoring technologies1389.
For the further development of these solutions with respect to human rights and
environmental DD needs, private sector providers may benefit from academic research-
based policy guidelines. For the textiles industry, for example, a recent Delphi study,
investigated and classified factors influencing traceability implementation and
traceability-related information that demands recording and sharing with businesses and
customers. Based on expert analyses, the authors conclude, for example, that origin,
1386 BCG. 2018. Pairing Blockchain with IoT to Cut Supply Chain Costs. Available at:
https://www.dhl.com/content/dam/downloads/g0/about_us/innovation/CSI_Studie_BIG_DATA.pdf; McKinsey 2016. Big data
and the supply chain: The big-supply-chain analytics landscape. Available at https://www.mckinsey.com/business-
functions/operations/our-insights/big-data-and-the-supply-chain-the-big-supply-chain-analytics-landscape-part-1; European
Commission 2015. Traceability across the Value Chain Advanced tracking systems. Business Innovation Observatory Contract No 190/PP/ENT/CIP/12/C/N03C01. Available at
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=2ahUKEwjJyf7esIfkAhUBaFAKHY5wChMQFjABe
gQIABAC&url=https%3A%2F%2Fec.europa.eu%2Fdocsroom%2Fdocuments%2F13393%2Fattachments%2F2%2Ftranslations
%2Fen%2Frenditions%2Fnative&usg=AOvVaw2PXz_OJiA0-B4C2xmTbuKj; DHL 2013. Big Data in Logistics. Available at
https://www.dhl.com/content/dam/downloads/g0/about_us/innovation/CSI_Studie_BIG_DATA.pdf; BVL International (2013).
Trends and Strategies in Logistics and Supply Chain Management. 1387 European Commission 2015. European Commission 2015. Traceability across the Value Chain
Advanced tracking systems. Business Innovation Observatory Contract No 190/PP/ENT/CIP/12/C/N03C01. Available at
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=2ahUKEwjJyf7esIfkAhUBaFAKHY5wChMQFjABegQIABAC&url=https%3A%2F%2Fec.europa.eu%2Fdocsroom%2Fdocuments%2F13393%2Fattachments%2F2%2Ftranslations
%2Fen%2Frenditions%2Fnative&usg=AOvVaw2PXz_OJiA0-B4C2xmTbuKj. 1388 Arviem. 2018. How IoT and Big data are accelerating the supply chain industry?. Available at https://arviem.com/de/iot-
and-big-data-supply-chain-industry/. 1389 Arviem. 2018. White papers on “Chemical Supply Chain Visibility” and “Food Supply Chain Traceability”. Available at
https://arviem.com/white-papers/.
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composition, manufacturer/supplier details, product specifications, and composition can
create decisive knowledge of traceability for the textile and clothing supply chain.1390
New legal obligations regarding human rights and environmental DD would add another
dimension to value chain management on top of already existing “cost drivers”, which
are currently the key determinants driving companies’ to adopt and expand supply chain
management technologies. Even though it is difficult to project which companies and
how many of them invest and adopt new technologies in the future, including
technologies that allow them to extract critical DD-relevant information, we expect a
significant rise in the utilisation of these technologies. While large businesses seem to be
the global frontrunners, these technologies could, in principle, be applied by SMEs and
micro businesses. Platform-based solutions, which might be operated by a small number
of large providers (like Amazon for online intermediation and data cloud services), could
become a low-cost and therefore affordable option for SMEs.
It is difficult to project the time horizon until a more rapid, cross-industry adoption will
take place. New EU regulations, including specific policy guidelines on required metrics
and/or EU-driven standardisation initiatives could spur innovation in new technologies,
software solutions, cross-industry platforms and platform-based business models. The
latter could comprise companies that offer audit-based data collections, data
management, hazard recognition and early-warning systems, but also companies that
provide primary data on the basis of on-site audits. A greater adoption of technology-
based services, internally and externally-sourced, is likely to translate to significant cost
savings across DD activities. However, a more detailed assessment of the technological
possibilities, opportunities and pecuniary impacts of new technologies on human rights
and environmental DD would require a separate study as it is beyond the scope of this
analysis.
3.1.3 Company-level Benefits
In this section, we discuss potential company-level benefits that are likely to result from
additional voluntary and mandatory due diligence (DD) activities.
The following assessment is based on a literature review as well as on the survey results
from the business survey. In the absence of quantitative studies, the assessment will
mainly discuss qualitative aspects. The lack of quantitative studies is due to the fact that
it is extremely difficult to isolate the effects of one responsible business conduct measure
from another since these tend to create multiple intermediate effects that play into each
other.1391 In addition, it has to be noted that most existing studies assess benefits
arising from general concepts such as sustainability reporting or corporate social
responsibility (CSR) activities and do not assess benefits accruing from due diligence
activities in particular. Similarly, most studies assess business practices rather than
impacts from regulations and laws which may not have identical impacts. This has to be
kept in mind when reading the following assessment.
1390 Agrwal, T. K. and Rudrajeet, P. 2019. Traceability in Textile and Clothing Supply Chains: Classifying Implementation
Factors and Information Sets via Delphi Study. Sustainability 2019, 11(6), 1698. Available at https://www.mdpi.com/2071-
1050/11/6/1698/htm. 1391 OECD (2016). Quantifying the Costs, Benefits and Risks of Due Diligence for Responsible Business Conduct Framework and
Assessment Tool for Companies- June 2016. Available at https://mneguidelines.oecd.org/Quantifying-the-Cost-Benefits-Risks-
of-Due-Diligence-for-RBC.pdf
449
Other EU Impact Assessments of legislation with similar elements assess economic
benefits in very different areas and tend to remain relatively broadly. The main
conclusions which are relevant for this impact assessment are summarised in the
following paragraphs, for a more comprehensive and detailed description see the
literature review section.
The Impact Assessment on the EU Non-financial Reporting Directive (EUNFRD) concludes
that the regulation is expected to provide benefits for companies at an internal and
external level. Internally, companies are expected to benefit from better employee
relations, improved management systems and internal processes. Externally, companies
are expected to benefit from an enhanced reputation, better perception by and dialogue
with stakeholders, as well as easier access to capital. The impact assessment also
expects overall economic benefits from better risk management and allocation of capital,
enhanced trust in business and better resource management. Similarly, the Impact
Assessment on the EU Conflict Minerals Regulation indicates that the main benefits for
companies are expected from reputational effects.
The Impact Assessment on a proposed EU Regulation on Sustainable Investment (2018)
focuses on general economic impacts rather than firm-specific impacts and concludes
that the regulation could provide economic benefits by fostering competition, efficiency,
innovation and the overall competitiveness of the European sustainable finance market.
The Impact Assessment of the EU Environmental Crime Directive (ECD) (Directive
2008/99/EC), also expects economic benefits in terms of a more balanced competition
within the European market and improved competitiveness of European products
internationally due to an improved confidence of third countries businesses in the quality
of products from the EU.
The Impact Assessment of the Seveso III Directive discusses mainly costs for operators,
but also expects some benefits related to improved risk management (the risk of major
accidents is reduced and the costs of major accidents are avoided). As a result of a
better safety management system business performance and competitiveness are
expected to improve, which increase efficiency and processes.
Some of the benefits which were pointed out to during the interviews related to
increased legal certainty, creation of a level playing field and benefits from EU-wide
harmonization.
Regarding legal certainty it was argued that a due diligence regulation will help
companies to respond to those risks that are considered to be of highest priority or most
severe, rather than focusing on those which are or may be most exposed in the public
domain and therefore criticized (see section 4.4. Due diligence practices in own
operations). Especially when budgets are limited, clear legal requirements could help to
prioritize and focus on the most important areas. This would enable them to cover their
reputational risks by complying with a clear law.
Another benefit of a new due diligence regulation which was mentioned during the
interviews is that it would create a level-playing field for companies in the EU since all
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companies would have to comply with the same requirements (see section 5.4. Option 4:
Regulation requiring mandatory due diligence as a standard of care).1392
In the survey it was also argued that harmonisation of due diligence requirements at the
EU level would reduce the complexity, uncertainty as well as the cost of ensuring and
demonstrating compliance with different laws and requirements (see section 6.1.
Harmonisation). In addition, it was argued that standardization amongst European
companies and brands could increase efficiency and improve coordination with business
partners since all would be speaking the same “language” and be liable to the same
requirements.
Finally, it was pointed out that a new regulation on due diligence would assumedly
increase the effectiveness of due diligence activities of companies which are already
following a voluntary due diligence policy. This would not only increase the motivation of
companies and their staff who are already frontrunners, but it would also increase the
impacts of the due diligence measures in third countries and could therefore potentially
reduce the costs for the individual company for their due diligence activities.1393
The literature review of academic studies and business reports (for more details, see
section 1) found that economic benefits from due diligence activities can arise in
different areas. The main economic benefits are described in four main areas.
1. brand and image reputation,
2. human resources,
3. risk management, operational efficiency and innovation,
4. and financial and stock performance, as well as cost of capital.
The first area of benefits is a company’s brand image and reputation. A company’s CSR
and sustainability activities can improve its brand image and reputation, which can turn
into concrete economic benefits in the form of higher sales and the ability to charge
higher prices than competitors which do not engage in sustainability measures. For
example, a regular online survey among 30,000 consumers, revealed that most
consumers (55%) were willing to pay extra for products and services from companies
that are committed to positive social and environmental impact. 1394 Another study found
that consumers perceived greater benefit and value in the product of a socially
responsible company and were willing to pay 10% more for such products. 1395 However,
it was also pointed out that (see section 4.12 Incentives for undertaking due diligence in
the Market Practices chapter) reputational effects mainly work for companies which are
consume-faced and they are less of a benefit for companies who are intermediaries,
work in public procurement or in the public sector. 1396
The second type of economic benefits can arise in the area of human resources. CSR and
sustainability activities can increase the attractiveness of a company for employers and
help to attract or retain high qualified staff and increase the loyalty and motivation of
1392 It was also argued that companies which are already frontrunners would not be impacted by a new legislation because they
are most likely already fulfilling the requirements (see section 5.4.3. On due diligence as a defence). 1393 Some companies argued in the interviews (see section 4.8. Leverage and the ability of individual companies) that the
“inaction of other [companies] hampers the effectiveness of [a company’s] due diligence efforts”, i.e. that their own efforts
would be more effective if other companies which are currently not pursuing due diligence measures would also do so. 1394 Nielsen (2014). Doing Well By Doing Good. Available at https://www.nielsen.com/us/en/insights/reports/2014/doing-well-
by-doing-good.html 1395 Ferreira, D. A. and Avila,M.G. and Dias de Faria, M. (2010). Corporate social responsibility and consumers' perception of
price. Social Responsibility Journal, Vol. 6 Issue: 2, pp.208-221. Available at https://doi.org/10.1108/17471111011051720 1396 It is argued that if the company name is not relevant for the public and consumers do not know a company, there is no risk
of public pressure.
451
employees, leading to higher efficiency and productivity. For example, an often-quoted
experimental study concludes that company’s corporate social performance can lead to a
competitive advantage by attracting and retaining high-quality candidates. 1397
The third area where economic benefits can arise comprises improved risk management,
operational efficiency and innovation. As international supple chains include many
different suppliers and stakeholders in different regions, due diligence can foster a
comprehensive risk management process to identify, assess, prevent and mitigate the
risks within these complex supply chains. This reduced risk can result in a concrete
economic impact. For example, an academic study assessing the impact of corporate
social performance on market-based company risk in Europe finds that better corporate
social performance – especially in the social dimension – can increase company value
through lower company risk. 1398 It was also pointed out in the interviews that a lack of
undertaking due diligence is a greater financial risk to the company than doing due
diligence (see section 5.4. Option 4: Regulation requiring mandatory due diligence as a
standard of care).
At the same time some authors argue that sustainability measures can have an impact
on a company’s operational efficiency and innovation. Accordingly, sustainability
measures can lead to a more efficient use of resources and therefore result in cost-
savings for a company. These sustainability and resource efficiency measures can then
provide opportunities for innovations, e.g. in the form of new products, process or new
logistic solutions (please see also section 3.1.2 Company-level Costs for a discussion of
impacts on innovation). A large meta-analysis concluded that most assessed studies
show a positive relationship between sustainability and operational performance. 1399 The
authors of the analysis therefore argue that good corporate environmental practices
positively influence the competitiveness of companies and lead to better corporate
performance. A consulting report on sustainability for consumer business companies also
concludes that sustainability is recognised increasingly as a primary driver for strategic
product and business model innovation. 1400
The fourth area in which sustainability measures can produce economic benefits are a
company’s financial and stock performance as well as capital costs. These are both
possible economic benefits that could result from different due diligence activities or
measures taken by companies, which increase a company’s reputation and therefore
foster its sales. This, in turn, leads to higher revenues or better stock market
performance which then also allow a company to get capital at lower cost. Companies
with good sustainability records may also be more attractive to investors due to the
expectation of lower risks and reduced information asymmetries from disclosure
standards. A recent meta-analysis of about 2,200 individual studies finds that the
business case for environmental, social, and governance (ESG) investing is empirically
very well founded. 1401 Another meta-analysis concludes that 80% of the assessed
1397 Greening, D. W., and Turban, D. B. (2000). Corporate Social Performance as a Competitive Advantage in Attracting a
Quality Workforce. Business & Society, 39(3), 254–280. https://doi.org/10.1177/000765030003900302. 1398 Sassen, R.; Hinze, A.K.; Hardeck, I. (2016). Impact of ESG factors on firm risk in Europe. Journal of Business Economics,
Volume 86, Issue 8, pp 867–904. Available at https://link.springer.com/article/10.1007%2Fs11573-016-0819-3 1399 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281 NOTE 40 1400 Deloitte (2012). Sustainability for consumer business companies. A story of growth. Available at
https://www2.deloitte.com/hr/en/pages/consumer-business/articles/sustainability-for-consumer-business-companies.html 1401 Bassen, A. and Busch, T. and Friede, G. (2015). ESG and financial performance: aggregated evidence from more than
2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917
452
studies find that a company’s stock price performance is positively influenced by its good
sustainability practices.1402
Some of these different types of benefits can be linked more directly to concrete due
diligence measures and may be experienced also in the short run, while other benefits
are more indirect results from sustainability activities and may be experienced rather in
the long-term.
In order to better understand how different impacts from due diligence activities are
interlinked and how they ultimately affect a company’s costs or revenues and translate
into concrete economic benefits, the OECD has groupeddifferent potential benefits from
due diligence measures into intermediate benefits and final impacts (Figure 8.7). The
intermediate benefits are the more immediate or direct benefits resulting from the due
diligence activities. In the longer term, these translate into concrete financial benefits by
either reducing a company’s cost or enhancing the revenue.
When comparing a company’s costs and benefits from due diligence activities it is
therefore important to not only consider impacts which may be felt more immediately
and can be linked more directly to due diligence measures, such as an improved brand
image and reputation, improved governance, transparency and management of supply
chains, leading also to reduced operational and strategic company risks. It is also
important to take into account how due diligence activities can turn into concrete
financial benefits in a longer term, although these may be linked less directly to the due
diligence activities since they are influenced also by other factors. The OECD report, for
example, foresees that an improved operational knowledge, i.e. a deeper knowledge of a
company’s supply chains, resulting reduced operational and strategic risks and improved
process and product innovations, will have a cost reducing effect by increasing a
company’s efficiency and reducing risks, while at the same time it will create more
growth opportunities and thereby increase a company’s revenue. Another channel how
due diligence activities can reduce a company’s costs in the longer term and enhance
revenues is through its improved reputation. According to the report, a better reputation
improves a company’s license to operate, its customer perception, brand loyalty and
ability to charge a price premium. In addition, the improved reputation can open up
sources of funding which were previously not available. These intermediate benefits are
expected to then translate into a reduction of capital costs, improve a company’s
position in the market, increase its brand equity and create more growth opportunities.
The following assessment of the different policy options and the possible economic
benefits for firms will be based on the literature review of the described four main areas
of economic benefits as well as on the results from the business surveys. As the concrete
design of a possible new regulations is yet to be developed, expected economic benefits
can only be described in general and any assumptions about possible economic benefits
depend largely on the content and design of a future regulation.
Again, these reputational impacts discuss the potential benefits which companies could
gain in relation to the status quo. However, stakeholders have expressed a discontent
with the existing legal landscape for reasons relating to reputational risks that they are
currently experiencing. Notably, companies indicated that their top incentive to
1402 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281
453
undertake due diligence is, or has been, reputational risks. The growing number of
investors-driven due diligence requirements are sharply bringing into focus the
reputation of the investee in undertaking effective due diligence. Case law and
interviewees both reflect the perception that companies with a good reputation may in
fact be legally targeted on the basis of their public commitments.
It is expected that these existing and significant reputational risks may be reduced
through the introduction of a general due diligence duty. It is not possible to quantify
these benefits at this early stage. However, given the significance which business
stakeholders place on reputational risks, it is likely that the most significant reputational
benefits from a mandatory due diligence requirement may result from a reduction in
existing reputational risks rather than an enhancement of existing reputational benefits.
Figure 8.7: Impact Chain for Benefits from Due Diligence Activities1403
Option 1: No policy change
As for all other impact areas, the possible economic benefits for firms and possibly
industries depend on the development of the policies in EU Member States and the
extent to which companies take due diligence measures on a voluntary or individual
basis. As described in the Regulatory Options section, it is expected that due diligence
requirements will increasingly be introduced by EU Member States, however it is unclear
what obligations these will entail for companies and whether individual companies might
take voluntary initiatives. Economic benefits for companies or specific sectors are
therefore difficult to assess.
Expected company benefits resulting from current DD activities
1403 Ibid.
Strong Management
Systems
Identificationof Risks
Management of Risks
Verification ofEffectiveness
Reporting
ImprovedGovernance
ImprovedOperational Knowledge
StrengthenedStakeholder Relationship
Reduced RiskImproved
TransparencyImproved
Reputation
§ Increased
transparency§ Better knowledge
of operations and
supply chains§ Improved
reputation§ Ability to attract
and retain talent
§ Deeper
knowledge ofsupply chains
§ Lower operational
and strategic risks§ Process and
productinnovations
§ Reduced risk of
operational disruption
§ Improved social
capital/license tooperate
§ Reducedconflicts/production interruption
§ Reducedlegal/litigation
cost
§ Reduced
operational and strategic risk
§ Reduced risk of
human rightsviolations,
accidents and environmental desasters
§ Reducedreputational risk
§ Reduced cost ofcapital
§ Improved
reputation§ Reduced cost of
capital
§ Improved social
capital/license tooperate
§ Improved
customerperception, brand
loyalty, ability tocharge pricepremiums
§ Access topreviously not
available sourcesof funding
Cost of Labour Operational
EfficiencyRisks/Adverse
Events Capital Cost
ComparativePositioning
Brand EquityGrowth
Opportunity
Cost Reducing Revenue Enhancing
Steps of Due Diligence
Intermediate Benefits
Impact on Bottom
Line
454
When companies were asked about the most significant benefits for their company
resulting from their current due diligence activities1404 (for human rights and
environmental impacts through the supply chain), the greatest benefits were seen in
greater supply chain certainty (42%), lower operational risks (34%) and greater legal
certainty (33%). In these three areas of benefits respondents saw either significant or
very significant benefits for their company rather than moderate, some or no benefits.
The results suggest that these three benefits are the perceived main benefits for
companies from their voluntary due diligence activities since the question addressed
benefits from current activities which are currently taken without an EU-wide regulation
that requires firms to take due diligences measures. No benefits from the current
activities were seen mainly for lower costs of capital (27%) and greater leverage over
non-EU suppliers (21%). It has to be acknowledged though that only one third of the
responding companies answered this question at all.
Table 8.41: Expected additional benefits from current DD activities
1404 Q21 in the Business Survey. For the full survey results, please see the Annex.
No
benefits
Some
benefits
Moderate
benefits
Significant
benefits
Very
significant
benefits
Do not know
Reputation-based
increases in
revenue (through
consumption/brand
value)
16.19% 21.90% 28.57% 12.38% 10.48% 10.48%
Reputation-based
increases in
investment
16.50% 20.39% 25.24% 17.48% 6.80% 13.59%
Improved quality /
life-cycle of
products / services
19.80% 20.79% 22.77% 18.81% 3.96% 13.86%
Greater supply
chain certainty 11.65% 21.36% 18.45% 25.24% 16.50% 6.80%
Greater legal
certainty 14.85% 18.81% 23.76% 22.77% 9.90% 9.90%
Greater leverage
over non-EU
supplier provided
by non-negotiable
standard
21.15% 22.12% 20.19% 19.23% 2.88% 14.42%
Lower operational
risk 12.50% 20.19% 25.96% 26.92% 6.73% 7.69%
455
In regard to possible benefits for companies’ brand image and reputation these depend
largely on the activities taken by companies either due to a national law to which they
are subject or due to voluntary initiatives. Those companies which are frontrunners and
advance due diligence activities on their own behalf and succeed to communicate well
about these activities can also experience benefits in terms of an improved brand image
and reputation which may result in higher sales of their products. At the same time, the
relative impact of enhanced reputation on a companies’ total sales may not generate
returns sufficient to cover the additional cost for compliance with legal standards.
For this option there are no specific economic benefits expected for firms arising from an
increased ability to attract and retain employees. This depends, however, as discussed
on how due diligence requirements develop in EU member states. Companies which
improve their due diligence policies and activities as a result of a national legislation or
voluntarily, could in theory experience economic benefits if they can attract better
qualified employees and these are better motivated.
If companies would advance their due diligence on their own initiatives or national laws
in EU Member States would require companies to take due diligence measures, it could
be expected that economic benefits for companies arising from better risk management,
operational efficiency and innovation could arise. These are also the areas where most
benefits are expected by business respondents (greater supply chain certainty (42%)
and lower operational risks (34%)). However, this is difficult to predict.
Economic benefits in the form of better financial and stock performance under this option
would be possible for those companies which improve their due diligence, either as part
of national regulations or voluntarily. Whether any economic benefits can be expected
would therefore depend on the individual actions taken by firms, which are difficult to
predict.
Lower cost of
capital (due to
lower risk)
27.00% 23.00% 19.00% 11.00% 1.00% 19.00%
Reputation-based
increases in
revenue (through
consumption/brand
value)
16.19% 21.90% 28.57% 12.38% 10.48% 10.48%
Reputation-based
increases in
investment
16.50% 20.39% 25.24% 17.48% 6.80% 13.59%
Q21 Business Survey; 106 responses.
456
Option 2: New voluntary guidelines / guidance
Additional benefits arising from new EU guidelines are expected in similar areas as the
observed benefits from ongoing activities under option 1.1405 Respondents mainly expect
significant or very significant additional benefits from new guidelines for their supply
chain certainty (22%), for a greater leverage over non-EU supplier provided by non-
negotiable standards (20%) or lower operational risks (16%). However, there is also
some ambiguity in the responses since also 30% and 27% of respondents answered that
they did not expect any additional benefits for their company for greater leverage over
non-EU supplier provided by non-negotiable standard and lower operational risks. In
addition, 33% and 30% do not expect any additional benefits in the form of lower cost of
capital (due to lower risks) or benefits stemming from the elimination of a comparative
disadvantage between companies regulated by different EU Member States.
Table 8.42: Expected additional benefits from Option 2
1405 Q24 in the Business Survey. For the full survey results, please see the Annex.
No
benefits
Some
benefits
Moderate
benefits
Significant
benefits
Very
significant
benefits
Do not know
Reputation-based
increases in
revenue (through
consumption/brand
value)
23.40% 20.21% 20.21% 11.70% 4.26% 20.21%
Reputation-based
increases in
investment
24.47% 22.34% 18.09% 9.57% 5.32% 20.21%
Improved quality /
life-cycle of
products / services
28.72% 15.96% 21.28% 9.57% 3.19% 21.28%
Greater supply
chain certainty 20.65% 15.22% 26.09% 17.39% 4.35% 16.30%
Greater legal
certainty 26.67% 17.78% 21.11% 7.78% 7.78% 18.89%
Greater leverage
over non-EU
supplier provided
by non-negotiable
standard
29.67% 15.38% 16.48% 14.29% 5.49% 18.68%
Lower operational
risk 27.17% 15.22% 27.17% 10.87% 5.43% 14.13%
Lower cost of 32.61% 17.39% 21.74% 5.43% 4.35% 18.48%
457
Possible benefits for firms are similar to those under option 1, i.e. they will depend
primarily on individual companies’ actions taken to follow national laws or for strategic
purposes as voluntary initiatives. New guidance on due diligence provided by the EU may
facilitate companies taking due diligence actions and benefiting from enhanced
reputation. However, the impact is expected to be negligible since already a large
amount of guidance exists which can be followed by companies interested in pursuing
due diligence activities.
Similar to option 1, possible economic benefits in the area of human resources depend
on voluntary due diligence actions taken by individual companies since a new guidance
does not prescribe companies to take any activities. As a large amount of guidance
exists already, it is not expected that economic benefits may arise for companies in
regard to their human resources.
Similarly, it is not expected that new voluntary guidance will provide an incentive for
companies to introduce or improve existing due diligence policies to an extent which
would provide tangible economic benefits from better risk management, operational
efficiency or innovation.
Economic benefits in the form of better financial performance of lower cost of capital are
not expected to be significant when introducing new voluntary guidance. In order to
experience tangible economic benefits such as better stock performance or lower cost of
capital a company needs to take substantial action which has to be communicated and
noted by the stock and capital markets. It is expected that the provision of new guidance
is not able to facilitate these changes and resulting benefits.
Option 3: New regulation requiring due diligence reporting
Business respondents to the survey expect mostly the same additional benefits from a
new regulation requiring due diligence reporting as under option 2 only that shares of
respondents which expect significant or very significant benefits increase.1406
1406 Q33 in the Business Survey. For the full survey results, please see the Annex.
capital (due to
lower risks)
Less distortion of
competition due to
more equal
standards for EU &
non-EU suppliers
28.26% 14.13% 20.65% 13.04% 6.52% 17.39%
No comparative
disadvantage
between companies
regulated by
different EU
Member States
30.11% 12.90% 19.35% 10.75% 7.53% 19.35%
Q24 Business Survey; 97 responses.
458
Respondents mainly expect benefits in the form of greater supply chain certainty (32%),
greater legal certainty (29%), greater leverage over non-EU suppliers provided by a
non-negotiable standard (24%), and lower operational risks (22%). However, a similar
share of the respondents expects no benefits for lower operational risks (32%) and lower
cost of capital (34%) indicating some ambiguity in the responses which may also be due
to the lack of details that could be provided about the design of the surveyed regulatory
options.
Table 8.43: Expected additional benefits from Option 3
No
benefits
Some
benefits
Moderate
benefits
Significant
benefits
Very
significant
benefits
Do not know
Reputation-based
increases in
revenue (through
consumption/brand
value)
30.23% 12.79% 27.91% 9.30% 6.98% 12.79%
Reputation-based
increases in
investment
30.23% 15.12% 23.26% 12.79% 4.65% 13.95%
Improved quality /
life-cycle of
products / services
33.72% 15.12% 19.77% 9.30% 5.81% 16.28%
Greater supply
chain certainty 25.88% 18.82% 14.12% 23.53% 8.24% 9.41%
Greater legal
certainty 24.71% 15.29% 17.65% 17.65% 11.76% 12.94%
Greater leverage
over non-EU
supplier provided
by non-negotiable
standard
27.06% 14.12% 21.18% 17.65% 5.88% 14.12%
Lower operational
risk 31.76% 16.47% 20.00% 15.29% 7.06% 9.41%
Lower cost of
capital (due to
lower risks)
34.12% 18.82% 15.29% 10.59% 2.35% 18.82%
Less distortion of
competition due to
more equal
standards for EU &
non-EU suppliers
27.91% 11.63% 23.26% 18.60% 5.81% 12.79%
459
The potential economic benefits for firms resulting from mandatory due diligence
reporting, depend on the extent to which mandatory reporting requirements enact
changes in companies’ policies. If public reporting leads to a revision of company policies
and improvements of their due diligence activities throughout their supply chains, this
could lead to economic benefits for companies in the EU, especially for those which are
considered as frontrunners. Since reporting will be mandatory there is an automatic
channel of communicating good due diligence policies to the broader public which in turn
can promote a company’s brand image and reputation. This is in turn the prerequisite for
a company to benefit from increased sales and revenues and benefit from concrete
financial compensation.
Also, other EU Impact Assessments of regulations with reporting requirements expect
reputational benefits for companies. The Impact Assessment on the EU Non-Financial
Reporting Directive concludes that the regulation is expected to provide benefits for
companies at an internal and external level. Externally, companies are expected to
benefit from an enhanced reputation, better perception by and dialogue with
stakeholders.
Similarly, the EU impact assessment on the Conflict Minerals Regulation indicates that
the main benefits for companies are expected from “unquantifiable externalities which
can be used for marketing purposes such as public image, Corporate Social
Responsibility (CSR) and consumer satisfaction”.1407
Similar to the discussion of potential benefits from brand image and reputation, the
economic benefits related to better human resources depend on the extent to which a
mandatory reporting requirement leads to changes in companies’ due diligence activities.
If a reporting requirement leads to due diligence activities which increase a company’s
reputation, then there can also be economic benefits from the possibility to attract better
staff and have lower turnover rates. The Impact Assessment on the EU Non-Financial
Reporting Directive also expects internal benefits for companies relating to their human
resources as companies are expected to benefit from better employee relations.
Similar to the discussion of potential benefits from brand image and reputation and that
related to human resources, economic benefits arising from better risk management,
operational efficiency and innovation will depend on the extent to which mandatory
reporting requirement are able to enact changes in company’s due diligence policies and
behaviour. The impact assessment of the EU Non-Financial Reporting Directive stipulates
1407 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Full external report available at https://publications.europa.eu/en/publication-detail/-
/publication/dced6d04-92fb-4a20-a499-4dad9974aee7 01aa75ed71a1.0001.01/DOC_3&format=PDF.
No comparative
disadvantage
between companies
regulated by
different EU
Member States
25.84% 13.48% 17.98% 17.98% 5.62% 19.10%
Q33 Business Survey; 89 responses.
460
expected overall economic benefits from better management of risks and allocation of
capital, enhanced trust in business and better resources management.
Again, the potential economic benefits in the form of better financial performance and
lower capital cost depend largely on the question of how much change mere reporting
requirements can enact changes in behaviour and whether these changes are
communicated by the company to its investors and capital markets. Concerning lower
capital costs 34% of the survey respondents do not expect any benefits from this
regulatory option. In contrast, however, the Impact Assessment of the EU Non-Financial
Reporting Directive concludes that the regulation is expected to provide benefits for
companies at the internal and external level and external level, of which the latter
includes easier access to capital.
Option 4: New regulation requiring mandatory due diligence as a legal
duty of care
Survey respondents mainly expect benefits in the form of greater leverage over non-EU
suppliers provided by a non-negotiable standard and greater legal certainty (46% each),
followed by greater supply chain certainty (44%) and lower operational risks (35%). If
no benefits are expected from mandatory due diligence, these are mainly for lower cost
of capital (due to lower risks) and reputation-based increases in investment (26% of
respondents rated these benefits).1408
Table 8.44: Expected additional benefits from Option 4
1408 Q42 in the Business Survey. For the full survey results, please see the Annex.
No
benefits
Some
benefits
Moderate
benefits
Significant
benefits
Very
significant
benefits
Do not know
Reputation-based
increases in
revenue (through
consumption/brand
value)
23.46% 22.22% 14.81% 11.11% 14.81% 13.58%
Reputation-based
increases in
investment
25.93% 19.75% 18.52% 11.11% 11.11% 13.58%
Improved quality /
life-cycle of
products / services
24.69% 16.05% 16.05% 14.81% 12.35% 16.05%
Greater supply
chain certainty 14.81% 16.05% 18.52% 22.22% 22.22% 6.17%
Greater legal
certainty 14.81% 16.05% 16.05% 18.52% 27.16% 7.41%
461
Similar to option 3, the potential economic benefits for companies from a new regulation
requiring mandatory due diligence depend on the extent to which such due diligence
activities are implemented and the extent to which companies succeed in communicating
the benefits to their consumers. If a company, as a result of a new EU regulation,
implements due diligence activities which are known by consumers, this can contribute
considerably to the company’s brand image and reputation. Research has shown that
this can foster the sales of its products and allow it to charge higher prices. Several
studies have found that socially and environmentally responsible companies are able to
charge higher prices for their products or experience higher sales rates1409. Other
researchers even found that consumers were willing to pay 10% more for products from
socially responsible companies. This option could therefore provide significant economic
benefits for firms related to their reputation and sales. 1410,1411
In addition, mandatory due diligence requirements would decrease reputational risks. At
the moment there is no existing law which reflects and is aligned with public
expectations about company behaviour. As a result, a company’s reputation can be
harmed even if the company is legally compliant. However, if there would be a new due
1409 Nielsen (2014). Doing Well By Doing Good. Available at https://www.nielsen.com/us/en/insights/reports/2014/doing-well-by-doing-good.html. 1410 Hainmueller, J. and Hiscox, M. (2015). Buying Green? Field Experimental Tests of Consumer Support for Environmentalism.
Working Paper. Available at https://scholar.harvard.edu/hiscox/publications/buying-green-field-experimental-tests-consumer-
support-environmentalism. 1411 Ferreira, D. A. and Avila,M.G. and Dias de Faria, M. (2010). Corporate social responsibility and consumers' perception of
price. Social Responsibility Journal, Vol. 6 Issue: 2, pp.208-221. Available at https://doi.org/10.1108/17471111011051720.
Greater leverage
over non-EU
supplier provided
by non-negotiable
standard
18.75% 11.25% 13.75% 20.00% 26.25% 10.00%
Lower operational
risk 18.52% 16.05% 22.22% 17.28% 17.28% 8.64%
Lower cost of
capital (due to
lower risks)
26.25% 15.00% 16.25% 12.50% 10.00% 20.00%
Less distortion of
competition due to
more equal
standards for EU &
non-EU suppliers
19.51% 10.98% 19.51% 15.85% 24.39% 9.76%
No comparative
disadvantage
between companies
regulated by
different EU
Member States
17.65% 14.12% 16.47% 15.29% 22.35% 14.12%
Q42 Business Survey; 85 responses.
462
diligence law which is more in line with consumers expectations, the company can
ensure that it does not suffer reputational harm by complying with the law, i.e. the law
would reduce reputational risks for a compliant company and at the same time provide
legal certainty. Companies are currently suffering reputational harm when they are
accused of unsustainable business practices which are actually legal, but claiming that
these practices are legal does not reduce the reputational damage as there is currently
such a big gap between what is legal and what is expected by consumers.
However, it may also play a role to which and how many companies the new regulation
applies. The more companies it would apply to, the smaller could be the potential
economic gains from an enhanced brand image and reputation, at least vis-à-vis other
European companies. The reason is that an individual company could not have a
competitive advantage from its due diligence activities if all other European companies
are taking the same or similar measures. Consumers could then only favour the
company’s products and be willing to pay higher prices if the company’s due diligence
policy and measures go beyond those of its European competitors. Vis-à-vis non-
European competitors, however, European companies could still benefit from
reputational effects. In addition, there could be a first mover advantage for European
companies in the global market since the latter is increasingly sensitive to sustainability
aspects (investors as well as consumers). The Impact Assessment of the EU
Environmental Crime Directive (ECD) (Directive 2008/99/EC), also expects economic
benefits from an improved competitiveness of European products internationally due to
an improved confidence of third countries businesses in the quality of products from the
EU.
Similar to the positive impacts on reputation and brand image, it can be expected that
increased due diligence activities by companies will increase their attractiveness for
employees. As a result, it can be expected that European companies may be able to
attract staff with better qualifications and be more likely to retain good staff.
Different studies have shown that sustainability measures and CSR activities can make a
company more attractive for job applicants in the sense that they prefer to work for that
company rather than for another company which is perceived less sustainable and/or
that a company can compensate with its reputation for less competitive salary packages.
One study found that 67% of participants to an online survey preferred to work for a
socially responsible company. 1412 And in order to work for a socially responsible
company 30-45% of university students would accept a 15% pay cut.1413
However, similar to the description of reputation and brand image impacts, benefits
related to human resources can also depend on a company’s relative advantage and the
coverage of companies. If all companies would conduct due diligence measures to a
similar extent and would therefore be similarly attractive for employees, a company may
be able to benefit less substantially from its due diligence activities. As stated above, vis-
à-vis non-European competitors, European companies could still benefit from
reputational effects and a potential first mover advantage in the global market.
1412 Nielsen (2014). Doing Well By Doing Good. Available at https://www.nielsen.com/us/en/insights/reports/2014/doing-well-
by-doing-good.html. 1413 Szeltner, M. and Zukin, C. (2012). Talent Report: What Workers Want in 2012. Study by Net Impact and Rutgers
University. Available at https://www.netimpact.org/research-and-publications/talent-report-what-workers-want-in-2012.
463
If a new EU regulation requires mandatory due diligence, it can be expected that
economic benefits for companies arise from better risk management, operational
efficiency and innovation. On the one hand, this is an expectation that is underlined
strongly by the survey results: greater supply chain certainty (44%) and lower
operational risks (35%) were two of the three main benefits expected by respondents
from this regulatory option. On the other hand, academic research finds that
sustainability measures by firms have a positive impact on the company risk and
operational efficiency which translates into concrete economic value. One study1414 finds
that better corporate social performance can decrease a company’s risk and thereby
increase its value. Another large meta-analysis concludes that 88% of the assessed
studies showed that solid environmental, social and governance (ESG) practices result in
better operational performance of firms, i.e. that there is a positive relationship between
sustainability and operational performance.1415 Other academic authors found that the
inclusion of ESG issues leads to cost savings for firms through innovation and resource
efficiency.1416
Other EU Impact Assessments also expect economic benefits for competitiveness,
efficiency and innovation from new regulations with sustainability requirements for
companies. The Impact Assessment on a proposed EU Regulation on Sustainable
Investment concludes that the regulation could provide economic benefits by fostering
competition, efficiency, innovation and the overall competitiveness of the European
sustainable finance market. Similarly, the Impact Assessment of the Seveso III Directive
expects benefits related to improved risk management (the risk of major accidents is
reduced and the costs of major accidents are avoided). As a result of a better safety
management system business performance and competitiveness are expected to
improve, which increase efficiency and processes.
It can also be expected that economic benefits for companies arise in the form of better
financial or stock performance and access to lower cost of capital if a new EU regulation
requires mandatory due diligence and leads to improved due diligence measures taken
by companies.
A large body of literature assessed the links between companies’ sustainability measures
and their financial performance. Empirical evidence of companies’ sustainability activities
and financial or stock performance largely indicates a positive relationship, although
there are also studies which cannot find a direct impact. For example, Clark et al.’s large
meta-analysis cited above shows that 80% of the assessed studies find a positive
influence of good sustainability practices on stock price performance. Similarly, another
empirical study finds that companies which have been employing environmental and
social policies over the past perform better regarding stock market and accounting
performance.1417 It finds that stocks of high-sustainability companies outperform those
of low-sustainability companies by 4.5% annually.
1414 Sassen, R.; Hinze, A.K.; Hardeck, I. (2016). Impact of ESG factors on firm risk in Europe. Journal of Business Economics,
Volume 86, Issue 8, pp 867–904. Available at https://link.springer.com/article/10.1007%2Fs11573-016-0819-3. 1415 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281. 1416 Eccles, R. G., and Serafeim, G. (2013). The performance frontier: Innovating for a sustainable strategy. Harvard Business
Review, May 2013, 50-60. Available at https://hbr.org/2013/05/the-performance-frontier-innovating-for-a-sustainable-
strategy. 1417 Eccles, R. G., and Ioannou, I. and Serafeim, G. (2014). "The Impact of Corporate Sustainability on Organizational
Processes and Performance," Management Science, vol 60(11), pages 2835-2857. Retreived from:
www.nber.org/papers/w17950.
464
The literature also suggests that sustainability activities of companies can have a
positive impact on companies’ cost of capital since companies with good sustainability
records may be more likely to attract investors due to the expectation of reduced risks.
Therefore, Clark et al.’s meta-analysis found that 90% of the studies on the cost of
capital indicate that good ESG standards lower the cost of capital for companies.1418
Similarly, another large meta-study finds that most of the assessed studies show a
significant relationship between sustainability performance and the cost of capital.1419
The cost reduction for equity is estimated by other researchers to be around 1%.1420
Sub-option 4.1: Narrow category of business (limited by sector)
The economic benefits for individual companies from an enhanced brand image or
reputation can be expected to be positive but smaller if all companies within a whole
sector would be liable to a new regulation and would therefore improve their due
diligence activities. The relative advantage for a company within the sector vis-à-vis its
direct competitors which are following the same standards could be rather small and a
company would need to advance its due diligence policies beyond the average of the
other companies and the required minimum standards set out in the regulation in order
to benefit from reputation effects. However, as described in the general text for option 4,
European companies in the selected sector(s) could still benefit from reputational effects
vis-à-vis non-European competitors. Similarly, European companies could benefit from a
possible first mover advantage in the global market, which may, depending on the
industry structure and export dependency of the selected sector(s), be of great economic
importance.
Similar to the description under brand image and reputation, potential economic benefits
related to the ability to attract and retain human resources for an individual firm within a
selected sector could be relatively small vis-à-vis European competitors, unless the
company would implement a more ambitious approach than the average of companies.
In this case it can be expected that economic benefits could arise from its possibility to
attract and attain talent better than its competitors. As described above, European
companies may be able to attract better and more international high-skilled labour on
the global market if there is a first mover advantage from increased and improved due
diligence measures.
The magnitude of economic benefits through better risk management, operational
efficiency and innovation from this regulator options depends on the size if the sector
and the resulting number of firms to which the regulation applies. The economic benefits
resulting from better risk management, operational efficiency and innovation can be
experiences independent of whether a company has a relative advantage vis-à-vis its
competitors. As a result, the larger is the sector to which the regulation applies, the
1418 Clark, Gordon L. and Feiner, Andreas and Viehs, Michael (2015). From the Stockholder to the Stakeholder: How
Sustainability Can Drive Financial Outperformance. Available at SSRN: https://ssrn.com/abstract=2508281 or
http://dx.doi.org/10.2139/ssrn.2508281. 1419 Gianfrate, G. and Schoenmaker, D. and Wasama, S. (2018). Cost of capital and sustainability: a literature review. Working
paper series 03, Erasmus Platform for Sustainable Value Creation, Rotterdam School of Management. Available at
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=2ahUKEwjdhZSr3vjhAhVEIVAKHTj8AiwQFjAEegQIBBAC&url=https%3A%2F%2Fwww.rsm.nl%2Ffileadmin%2FImages_NEW%2FErasmus_Platform_for_Susta
inable_Value_Creation%2F11_04_Cost_of_Capital.pdf&usg=AOvVaw1Csckr51QrS7OOrmnzFYrH. 1420 Bliss, R. and Jordan, S. and Rochlin, S. and Yaffe Kiser, C. (2015). Project ROI Report: Defining the Competitive and
Financial Advantages of Corporate Responsibility and Sustainability. IO Sustainability, Lewis Institute for Social Innovation at
Babson College. Available at https://www.issuelab.org/resource/project-roi-report-defining-the-competitive-and-financial-
advantages-of-corporate-responsibility-and-sustainability.html.
465
more companies are required to take due diligence measures and the more economic
benefits can be experienced.
The economic benefits for individual companies from improved stock performance and
lower cost of capital would remain the same, but the benefits overall for the economy
would be lower since only a selected sub-set of companies would be affected. Concerning
the choice of sectors one study found that the relationship between social and
environmental policies and stock market and accounting performance is stronger in
sectors where companies deal with consumers (B2C) not companies (B2B), where
companies compete based on brands and reputations and where products depend on
large amounts of natural resources.1421 This may be kept in mind when formulating a
concrete regulatory option of this kind.
Sub-option 4.2: Horizontally across sectors
The potential benefits arising for individual firms from their improved brand image and
reputation and from their increased attractiveness for employees may differ depending
on the number of firms to which the new regulation applies, as described below.
The economic benefits arising from better risk management, operational efficiency and
innovation as well as those created by better stock performance and lower capital cost
are expected to be the largest when applying to a large number of companies.
Sub-option 4.2(a): Set of large companies
The extent of potential economic benefits resulting from enhanced brand image and
reputation would depend on the number of companies which would be affected by the
regulation. In general, if a set of few large companies would be affected by the
regulation, it can be assumed that the companies would benefit from improved
reputation, especially vis-à-vis other companies which are not following the same
standards (i.e. other European companies which are not affected or non-European
companies). However, the extent to which sales increase depends on a great number of
firm- and sector-level characteristics. The affected large companies are also likely to
benefit from a first-mover advantage on the global market.
Similar to the described benefits from brand image and reputation it can be expected
that an application of the new regulation to a small set of large companies only would
enable individual companies to benefit from their increased ability to attract and retain
talent, especially vis-à-vis companies which are not applying the same due diligence
standards.
The potential economic benefits under this regulatory option are expected to be smaller
than those expected under options 4.1 and 4.2(b) as it would only apply to a small set of
large companies.
Similarly, the potential economic benefits are expected to be smaller than those
expected under options 4.1 and 4.2(b) as it would only apply to a small set of large
companies.
Sub-option 4.2(b): All business, including SMEs
1421 Eccles, R. G., and Ioannou, I. and Serafeim, G. (2014). "The Impact of Corporate Sustainability on Organizational
Processes and Performance," Management Science, vol 60(11), pages 2835-2857. Retreived from:
www.nber.org/papers/w17950
466
It can be expected that the economic benefits for a company resulting from an enhanced
brand image and reputation could be relatively small vis-à-vis direct EU competitors if all
EU companies would be liable to the new regulation. This could be the case if, as a
result, improved due diligence policies and measures by companies would become the
norm and the expected standard. In this case companies could probably not experience
an enhanced brand image that would translate into higher sales or the willingness to pay
higher prices by customers since all companies would be required to have similar
minimum standards. A company would then need to go beyond the minimum standards
set out in the new regulation and carry out better due diligence in order to have an
advantage for its reputation and be able to charge higher prices as a result or sell more.
However, as discussed under the general section for option 4, European companies could
still benefit from reputational effects vis-à-vis non-European companies and could
experience a first-mover advantage on the global market. The extent to which sales
increase depends on a great number of firm- and sector-level characteristics. It should
be noted that smaller companies are less likely to financially benefit from reputation-
induced benefits. Due to their small size, a reputation-based increase in total sales is
less likely to generate additional income sufficient to cover the additional costs that
result from new DD requirements.
Table 8.45 exemplarily outlines how additional costs can impact on small companies’
income and profitability respectively. As outlined above, it should be noted that these
numbers are also hypothetical. We calculated average revenues by sector for all EU28
companies with 10-49 employees. We assumed a general profit margin of 10%, which
was applied to all sectors across the board for small EU28-based companies. We also
assumed a reputation-induced increase in small companies’ sales of 10%. Based on the
10% margin, we calculated companies’ ex-ante profits, i.e. profits before the
implementation of DD regulation. We then applied annual cost estimates for mandatory
DD based on “alternative total costs”, which results in small companies’ ex-post costs.
For the manufacturing sector, for example, a 10% reputation-induced increase in the
revenues of companies with 10-19 employees translates to a 34% decrease in
companies’ average corporate income. A reputation-induced increase in the revenues of
manufacturing companies with 20-49 employees translates to a 5% decrease in
companies’ average corporate income. Accordingly, small companies with relatively low
annual revenues might not be able to compensate higher cost by reputation-induced
increases in sales and net income respectively. Compared to large companies with
relatively high sales volumes, small companies with low profit margins are at a much
greater risk of being driven out of business as the reputation-induced increase in sales
might not generate income sufficient to cover the additional regulation-induced cost
burden.
467
Table 8.45: Potential impact of mandatory DD on small companies’ revenues and profit margins, by sector, approximated annual cost of
mandatory DD based on “alternative total costs” (median data)
EU28 Size
Annual
revenue/compan
y
Ex ante income
at 10% profit
margin
Approximate annual
cost of mandatory
DD, based on
“alternative total
costs” (median data)
Ex post
income at
10% profit
margin
Ex post income at 10%
profit margin after 10%
reputation-induced
growth in revenues
Relative
change in
ex post
profits
B Mining and quarrying 10-19
EUR
2,468,810
EUR
246,881
EUR
75,000
EUR
171,881
EUR
196,569
-20%
C Manufacturing 20-49
EUR
7,249,714
EUR
724,971
EUR
100,000
EUR
624,971
EUR
697,469
-4%
D Electricity, gas, steam
and air conditioning
supply
10-19
EUR
1,715,826
EUR
171,583
EUR
75,000
EUR
96,583
EUR
113,741
-34%
E Water supply;
sewerage, waste
management and
remediation activities
20-49
EUR
4,968,763
EUR
496,876
EUR
75,000
EUR
421,876
EUR
471,564
-5%
F Construction 10-19
EUR
24,522,320
EUR
2,452,232
EUR
75,000
EUR
2,377,232
EUR
2,622,455
7%
G Wholesale and retail
trade; repair of motor
vehicles and motorcycles
20-49
EUR
37,493,750
EUR
3,749,375
EUR
75,000
EUR
3,674,375
EUR
4,049,313
8%
H Transportation and
storage 10-19 EUR EUR EUR EUR EUR -20%
468
2,535,421 253,542 75,000 178,542 203,896
I Accommodation and
food service activities 20-49
EUR
5,827,666
EUR
582,767
EUR
75,000
EUR
507,767
EUR
566,043
-3%
J Information and
communication 10-19
EUR
1,518,408
EUR
151,841
EUR
75,000
EUR
76,841
EUR
92,025
-39%
L Real estate activities 20-49
EUR
4,013,354
EUR
401,335
EUR
75,000
EUR
326,335
EUR
366,469
-9%
M Professional, scientific
and technical activities 10-19
EUR
3,921,197
EUR
392,120
EUR
75,000
EUR
317,120
EUR
356,332
-9%
N Administrative and
support service activities 20-49
EUR
11,310,863
EUR
1,131,086
EUR
75,000
EUR
1,056,086
EUR
1,169,195
3%
Source: Own approximations based on Business and Stakeholder Surveys.
469
Similar to the described benefits from brand image and reputation, it could be expected
that no or only small benefits would be created related to human resources for individual
businesses since all companies would need to implement a similar due diligence
standard. However, those companies which would pursue a due diligence practice
beyond the average or minimum standard might benefit from a relatively higher
attractiveness for employees.
As economic benefits resulting from improved risk management, operational efficiency
and innovation do not depend on a relative advantage vis-a-vis competing firms, but all
firms can simultaneously benefit from a better risk management and operational
efficiency, a broader application of a new regulation would provide more benefits. Since
this regulatory option would apply to all companies in the EU, this regulatory option is
expected to provide most economic benefits from better risk management, operational
efficiency and innovation.
Same as for risk management and operational efficiency this regulatory option would
provide most economic benefits from better stock performance and lower capital costs as
it would apply to all companies in the EU.
Sub-option 4.2(c): All business plus specific additional obligations only applying
to large companies
Depending on the additional obligations and the ability of large companies to
communicate their additional achievements regarding the additional obligations to their
customers, this option may provide large companies with the possibility to enhance their
brand impact and reputation vis-à-vis smaller companies with less due diligence
activities. Whether such additional obligations would translate into advantages for their
brand image and reputation might also depend on the types of additional obligations and
how important these are considered by customers.
As outlined above, the extent to which sales increase depends on a great number of
firm- and sector-level characteristics. Generally, the higher companies’ additional cost,
the more likely a decrease in these companies’ net income. Companies with low profit
margins could be at risk of being driven out of business if the reputation-induced
increase in sales does not generate sufficient income to cover the additional regulation-
induced cost burden.
For economic benefits related to human resources, the same considerations apply as
those described for brand image and reputation.
Whether additional obligations for large companies would provide additional economic
benefits resulting from an improved risk management and better operational efficiency
of those companies, depends on the additional obligations. If these would specifically
address risk management and matters of operational efficiency, the resulting economic
benefits may increase. Additional obligations relating to the Paris Agreement are difficult
to see how they would contribute to improving risk management and operational
efficiency; however they my potentially help to foster innovation.
Again, whether additional obligations for large companies would provide additional
economic benefits resulting from an improved stock performance of lower cost of capital
depends largely on the additional obligations and is therefore difficult to assess.
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory oversight and
/ or enforcement mechanism
470
Having additional enforcement mechanisms in place might increase not only the
compliance by companies with the new regulation but also the credibility of their due
diligence activities and reporting. This could potentially increase the economic benefits
arising from improved brand image and reputation. However, as discussed for option
4.2(b) this would also depend on the set of companies to which the regulation applies
and whether the enhanced brand image would provide a competitive advantage vis-à-vis
a company’s most important competitors.
Similar as for brand image and reputation it can be assumed that any type of
enforcement mechanism might increase the due diligence activities taken by companies
as well as their credibility vis-à-vis their current and potential future employees. As a
result, companies may be better able to attract and retain qualified people and draw
economic benefits out of that. Again, it depends on the relative advantages vis-à-vis a
company’s competitors.
It can be expected that additional enforcement mechanisms would increase the
compliance by companies and thereby increase also potential economic benefits from
improved risk management and operational efficiency.
Same as for risk management and operational efficiency, it can be expected that
additional enforcement mechanisms would increase the compliance by companies and
thereby increase also potential economic benefits from better stock performance and
lower cost of capital.
The considerations discussed for sub-option 4.3 in general, also apply for the specific
sub-options 4.3(a): Mechanisms for judicial or non-judicial remedies and 4.3(b): Sub-
option 4.3(b): State-based oversight body and sanction for non-compliance.
3.1.4 Comparison of options and final assessment
Under the status quo (option 1) it is unclear how national regulations will develop and
what obligations these will entail for companies and/or whether individual companies
might take voluntary initiatives. According to the survey, the greatest economic benefits
are expected from greater supply chain certainty (42%), lower operational risks (34%)
and greater legal certainty (33%). It is expected that an economic benefit could also be
expected if companies advance due diligence activities on their own behalf and succeed
to communicate these. These companies could experience benefits in terms of an
improved brand image and reputation which may result in higher sales of their products.
For the introduction of new voluntary guidelines (option 2), additional benefits are
expected in similar areas as the observed benefits from ongoing activities under option
1. Business respondents to the survey expect additional economic benefits for their
companies resulting from increased supply chain certainty (22%), from a greater
leverage over non-EU supplier provided by non-negotiable standards (20%) and from
lower operational risks (16%). Benefits from improved reputation and brand image will,
again, depend primarily on individual companies’ actions taken. It is not expected that
voluntary guidelines can have a significant impact on these. Similarly, possible economic
benefits in areas such as human resources, arising from improved risk management,
operational efficiency and innovation or better financial/stock performance and lower
capital cost depend on voluntary due diligence actions by companies. Therefore, it is not
expected that economic benefits in these areas arise under this policy option.
471
For the introduction of a mandatory reporting requirement (option 3), survey
respondents expect additional benefits in similar areas as for option 2, i.e. benefits in the
form of greater supply chain certainty (32%), greater legal certainty (29%), greater
leverage over non-EU suppliers provided by a non-negotiable standard (24%) and from
lower operational risks (22%). Again, potential economic benefits for firms resulting
from mandatory due diligence reporting depend on the extent to which mandatory
reporting requirements enact changes in companies’ policies. The likelihood can be
expected to be higher than for voluntary guidelines since public reporting may provide
some incentives to improve company policies and practices on sustainability issues.
However, based on experiences from the EU NFRD this effect is expected to remain
relatively low. Therefore, economic benefits in the area of human resources, arising from
improved risk management, operational efficiency and innovation or better
financial/stock performance and lower capital cost are expected to remain low.
Looking at mandatory due diligence requirements (option 4), respondents again expect
economic benefits in the same areas: They are mainly expected in the form of greater
leverage over non-EU suppliers provided by a non-negotiable standard and greater legal
certainty (46% each), followed by greater supply chain certainty (44%) and lower
operational risks (35%).
Option 4 could provide significant economic benefits for firms related to their brand
image, reputation and sales, if companies will, as a result of the new regulation,
increasingly implement due diligence activities and these are known by consumers.
Existing studies have shown that sustainability measures can foster the sales of a
company’s products and allow it to charge higher prices. However, these benefits may
be lower if the regulation is applied EU-wide. The reason is that an individual company
would not have a competitive advantage from its due diligence activities vis-à-vis other
European companies if all companies are taking the same or similar measures. A
competitive advantage would then only exist vis-à-vis companies from non-EU countries
which are not required to implement due diligence measures.
Similarly, economic benefits in the area of human resources can be expected as
sustainability measures and CSR activities can make a company more attractive for job
applicants and therefore companies can attract talents even when they do not pay highly
competitive salaries.
Economic benefits can also be expected from better risk management, operational
efficiency and innovation. Several studies have found that sustainability measures by
firms have a positive impact on the company risk and operational efficiency which
translates into economic value.
It can also be expected that economic benefits for companies arise in the form of better
financial or stock performance and access to lower cost of capital if a new EU regulation
requires mandatory due diligence and leads to improved due diligence measures taken
by companies. Several studies find a positive relationship between companies’
sustainability activities and financial or stock performance. Other studies also suggest
that sustainability activities of companies can have a positive impact on companies’ cost
of capital.
When comparing a company’s costs and benefits from due diligence activities it is
important to point out that there may be economic benefits which are felt more
immediately and can be linked more directly to due diligence measures, such as an
472
improved brand image and reputation, improved governance, transparency and
management of supply chains, leading also to reduced operational and strategic
company risks. However, there are also economic benefits which may occur in a rather
long-term perspective and which may be less directly linked to a company’s due
diligence activities since they are influenced also by other factors. For example, a more
direct benefit in the form of an improved operational knowledge (i.e. deeper knowledge
of a company’s supply chains and reduced operational and strategic risks) can reduce a
company’s cost in the long-term by increasing its efficiency and reducing risks and can
increase a company’s revenue by creating more growth opportunities.
In summary, the total cost that companies face critically depends on the details of the
legal requirements. Our estimates generally demonstrate that irrespective of companies’
sizes, the costs increase with the escalation of policy requirements. In other words, as
expected, more comprehensive DD requirements have a far greater bearing on
companies’ balance sheets than mere reporting requirements. In such context, while
increasing costs could prove detrimental for SMEs, their knowledge of business partners
may allow them to reduce costs1422 as they gain leverage to perform due diligence along
their value chain. At the same time, it should be noted that, due to the implementation
of efficient DD procedures, e.g. by use of modern tracking technologies, some SMEs may
actually face lower relative cost than large companies. Regarding technology solutions,
our results show that new tracking technologies and software-supported value chain
management systems are likely to simplify DD tasks for companies of all sizes.
Finally, the estimations provided in this section should be considered with caution, as
they are based on a limited subset of participants that by no means represent the overall
companies’ ecosystem at the EU level.
3.2 Impacts on non-Economic spheres: Social, Human Rights and
Environmental Impacts, and Impacts on Public Administration
This preliminary impact assessment of regulatory options, focusing on the social, human
rights, environmental, and public administration impacts, first provides general remarks
and descriptions of each impact area. Thereafter, the four impact areas are analysed in
detail for each policy option. Finally, the report presents a global comparison of the
policy options, highlighting the most relevant challenges/costs, and
opportunities/benefits across areas.
3.2.1 General remarks and description of impact areas
Social impacts
An assessment of social impacts can refer to a broad range of issues which concern
possible impacts on society as a whole as well as the well-being of individuals within a
society. Therefore, an assessment of social impacts can include impacts on employment
and work conditions as well as impacts in broader areas such as education, public health,
community welfare or rural development.1423 The “Guidance for assessing Social Impacts
1422 Lin, Feng-Jyh, and Yi-Hsin Lin. 2016. "The Effect of Network Relationship on the Performance of Smes". Journal of Business
Research 69 (5): 1780-1784. https://doi.org/10.1016/j.jbusres.2015.10.055 1423 Social impacts are also often closely related to human rights issues, which are assessed in a different section, and some
aspects could be discussed as part of both areas of impact – social impacts and human rights impacts. For the purpose of this
impact assessment, basic labour rights concerning child and forced labour are discussed as part of social impacts, although
these are also key human rights impacts in the context of business activities.
473
within the Commission Impact Assessment system” refers to six broad impact areas:
Employment and labour market; standards and rights related to job quality, social
inclusion and protection of particular groups; equality of treatment and opportunities,
non-discrimination; social protection, health, social security and educational systems;
and public health and safety.1424
Which potential social impacts are the most relevant impacts to assess, depends to a
large extent on the final content of a new regulation, whether or which areas are
specified e.g. in reporting requirements or as part of due diligence requirements, and
how enforcement would take place. Existing impact assessments on non-financial
reporting requirements and due diligence obligations largely focus on the potential
impact on workers and working conditions. However, the impacts on other rights-holders
who are not workers are less well-documented.
This is not a full impact assessment of a regulatory proposal. As such, the assessment of
social impacts will consider those areas which are expected to be most likely or directly
affected by a new regulation. This assessment of social impacts will mainly focus on two
aspects which can be related to a potential change in companies’ practices: First, it will
discuss the potential impacts of the proposed policy options on employment/working
conditions1425 in the EU as well as the possible impacts on work conditions and basic
labour rights in third countries. Second, it will discuss potential employment effects in
the EU (and possibly third countries) as a result of additional requirements for
businesses which may affect their competitiveness.
It is assumed that the first area of social impacts can be linked relatively directly to the
possible operational changes enacted by a new regulation for companies. Working
conditions are directly affected by company policies and practices, same as basic labour
rights in companies’ supply chains. Impacts on employment are less direct and
influenced by other economic factors. Nevertheless, employment is an important factor
to be taken into account and therefore is discussed briefly for each option.
In contrast, the assessment of social impacts will not discuss issues which are rather
broadly and indirectly linked to the assessed policy options, such as income distribution,
poverty or social inclusion. Impacts on income distribution and social inclusion could
likely result from changes in employment and wages in particular sectors, but impacts
are rather indirect. Moreover, such broad areas of societal development are
simultaneously influenced by various other factors such as the general state of the
economy and specific social policies which makes impacts from a new regulation difficult
to assess.
In general, most social impact assessments are discussed in a qualitative way as most
social impacts are difficult to quantify. This is the case also for most impact assessments
concerning similar legislative initiatives (e.g. the EU Impact Assessments on Conflict
Minerals, Non-Financial Reporting or on the Timber Regulation). Moreover, since many of
1424 DG Employment, Social Affairs and Inclusion (2009). Assessing Social Impacts. Ref. Ares (2009) 326974 - 17/11/2009.
Available at: https://ec.europa.eu/smart-regulation/impact/key_docs/docs/guidance_for_assessing_social_impacts.pdf. 1425 The ILO describes working conditions as: “Wages, working time, work organization and conditions of work, arrangements to balance working life and the demands of family and life outside work, non-discrimination and protection from harassment
and violence at work are core elements of the employment relationship and of workers’ protection, and also affect economic
performance. Working conditions cover a broad range of topics and issues, from working time (hours of work, rest periods, and
work schedules) to remuneration, as well as the physical conditions and mental demands that exist in the workplace.” Source:
International Labour Organisation (ILO) (n.a.). Working Conditions. Available at:
https://www.ilo.org/global/topics/dw4sd/themes/working-conditions/lang--en/index.htm
474
the national legislative initiatives have only been implemented in recent years, at the
time of writing no comprehensive studies on their implementation and possible social
impacts exist yet.
Impacts on Human Rights
The human rights impacts section presents an in-depth analysis of the survey responses
for each of the four policy options, paying particular attention to fundamental rights of
concern including children’s rights and freedom from slavery, as well as sectors of
concern such as retail, manufacturing, and mining. The analysis draws from the
literature review and links it to the survey results that assess stakeholder and company
expectations regarding due diligence impacts. The in-depth review of the survey
responses focuses on respondent’s expectations of the ability of the four policy options
to have an impact on human rights. Of particular interest, the analysis distinguishes
between stakeholder estimations and self-reported expectations from business
representatives. Considering historical links between business and sensitive human
rights dimensions, the analysis conducts a sector-specific assessment of company
responses. The analysis likewise links evidence of implications of existing but more
narrowly limited due diligence requirements, to highlight the unintended consequences
that addressing human rights challenges in one region may have on another region.
To assess impacts on children and vulnerable communities, we assess companies’
current due diligence practices and the self-reported survey results from their expected
impacts of new due diligence regulations. As already noted, the study assumes that
specific sectors (such as the case of conflict minerals) and historical contexts mean that
some sectors may have developed greater capacity to mitigate impacts on vulnerable
communities due to existing standards applicable to their operations and public scrutiny.
Considering the wide range of industry representation, the analysis considers the current
and past realities of the various sectors in protecting vulnerable persons – for example
focusing on the manufacturing and retail sectors’ ability to improve due diligence for
human rights and environmental impacts. In line with the environmental impact
assessment approach that follows, findings were cross-checked against relevant
literature.
Companies and stakeholders were first asked to describe the language they employ to
refer to their due diligence processes, their current practices and the human rights and
environmental aspects covered in their measures. Thereafter, to address options 2 to 4,
companies and stakeholders were asked whether they considered that the new
regulation was likely to have a social, human rights or environmental impacts. This
accounts for their perception about the capacity of the different regulation alternatives to
influence implementation of due diligence duties. Additionally, respondents who
indicated that the regulation was likely to have impacts on human rights were asked to
evaluate the potential impact of each policy option across 19 specific human rights,
confirming whether they foresee positive, neutral or negative effects of the specific
proposed regulation on each right. These responses allow the researchers to assess
specific areas that could either present the greatest opportunities for right-holders or
pose the biggest challenges for significant impact.
Due to data limitations, the participants’ prospects for the sub-options of the fourth
alternative (new regulation requiring mandatory due diligence) are studied considering
the general definition of the option. Respondents were presented a general scenario of
475
mandatory due diligence without specifying any enforcement mechanisms or differential
conditions according to company size or economic sector concerning human rights
impacts, for example.
Environmental Impacts
The process to introduce new regulations with an environmental dimension is not
exempted from resistance and frictions among businesses and governments. Alongside
transport, the environment has consistently been among the three most challenging
sectors in terms of complaints against financial sanctions for infringement of
regulations.1426 The existing guidelines, such as UNGPs and the OECD Guidelines, provide
a framework based on protecting and respecting human rights and the environment, as
well as mitigating and remedying damages derived from businesses’ operations. These
aim to ease and improve compliance along supply and value chains, explicitly addressing
environmental issues at different levels, including climate-related due diligence and the
risks that climate change poses to business.
The environmental impacts section presents an in-depth analysis of the survey
responses for each of the four policy options, paying particular attention to
environmental and climate-related aspects concerning current due diligence practices, as
well as the expectations that companies and stakeholders have regarding new due
diligence regulation alternatives.
To address options 2 to 4, companies and stakeholders were asked whether they
considered that the new regulation was likely to have an impact on the environment.
Additionally, respondents who expected impacts from the new regulations, had to
evaluate the potential impact of each policy option across ten environmental areas,
indicating whether they expected positive, neutral or negative effects. These evaluations
allow identifying specific areas that could be left behind by each alternative, or even
negatively influenced according to the perceptions of respondents. Regarding the no
policy change scenario, companies and stakeholders described the language they
employed to refer to their due diligence processes, their current practices and the
environmental aspects covered in their measures.
As mentioned above, the participants’ prospects for the sub-options of the fourth
alternative (new regulation requiring mandatory due diligence) are studied under the
general definition of the option due to data limitations.
Impact on legal systems of Member States and public administrations
This section provides an assessment of the potential costs and benefits for public
authorities in EU Member States, and on the EU-level for the European Commission. It is
necessary to point out, however, that, as this is only a preliminary study, it is not
possible to consider the precise legal implications of a specific regulatory proposal, and
that regulatory mechanisms in this area are new and rare. It is therefore not possible to
estimate the final impact of the policy options analysed in this study. The discussion by
policy option mainly serves to highlight factors that may need to be taken into account
when a regulatory proposal is formulated, and its impacts are tested with stakeholders.
1426 Smith, Melanie. 2018. "Challenges in the Implementation of EU Law at National Level". European Parliament. Retrieved
from:
http://www.europarl.europa.eu/RegData/etudes/BRIE/2018/608841/IPOL_BRI(2018)608841_EN.pdf
476
In particular, the discussion of impacts on public authorities outlines several potential
cost factors and their likely magnitude. It will also outline the potential benefits, which
would need to be reflected upon and assessed in more detail when the regulatory
options are defined in more detail, as part of the full impact assessment required if a
regulatory proposal were to be formulated.
The following discussion of impacts is based mainly on previous impact assessments of
similar legislation, which includes certain national laws discussed in the Regulatory
Review. In the stakeholder survey, respondents addressed two questions about the
potential impacts on public authorities. It should be noted that almost all respondents
stated that they were unable to indicate any costs as these would depend on the scope
of the precise legal implications of a potential regulatory mechanism. Therefore, it was
considered “impossible to measure without more concrete scope or definitions”.1427
The introduction of a new regulation on human rights and environmental due diligence
could lead to different costs arising from an additional administrative burden for public
authorities in EU Member States as well as on the EU level. This includes, for example,
costs related to guidance on the implementation of the new regulation, communication
activities, monitoring activities to supervise and assess the implementation of the
regulation, such as sample reviews and inspections of companies, enforcement in case of
non-compliance, as well as judicial costs. Significant additional costs will be created
whenever new bodies and institutional structures will need to be set up.
In general, it is not expected that a new regulation on human rights and environmental
due diligence would provide apparent economic benefits for public authorities in EU
Member States or at the EU level. Economic benefits for public authorities in EU Member
States could only arise if it was more efficient to have an EU-wide regulation and EU
Member States would, as a result, not advance similar individual legislative initiatives
which would create an administrative burden for Member States which would exceed
that of a new EU-wide regulation.
3.2.2 Assessment of impacts by policy option
Option 1: No policy change
Social Impacts
The development of the current baseline scenario depends largely on the different
policies which EU Member States will advance and implement in the coming years. As
described in the section on Regulatory Options, due diligence requirements have already
been introduced or proposed in some EU Member States (e.g. France, Germany, UK) and
it is expected that due diligence requirements will increasingly be introduced by EU
Member States and countries outside of the EU. However, without knowing the precise
scope of such national initiatives and whether these include legally binding requirements
for companies, social impacts are difficult to assess.
Work conditions and labour rights
If EU Member States increasingly introduce, on a national level, mandatory due diligence
laws with a comprehensive coverage including social aspects such as work conditions or
1427 See the Survey Results presented in the Annex.
477
labour rights, it can be expected that these laws could have positive effects for the
workforce in the EU as well as in third-countries if the application of such laws extends to
the whole supply chain. If EU Member States introduce national laws which are less
binding and/or have a smaller coverage of issues the expected social impact on
employment conditions in the EU and supplying countries would be smaller, although
there would still be an improvement compared to not taking any action.
Employment
It can be assumed that this option would not have an impact on employment levels,
either in the EU or in third countries. The reason is that the current status quo is not
expected to lead to any differences in the production volumes of EU companies and the
number of employed people. However, this depends on how national legislation will
develop.
Having different national legal frameworks in different Member States could potentially
lower any positive social impacts from due diligence requirements if national laws are
designed in a way where the law of one Member States contains less strict due diligence
requirements than another Member States. This could incentivise a large company to
(re)organize its corporate structure in such a way that it would avoid liability in another
Member State which poses more demanding requirements.
Human rights and environmental impacts
This section shows the current situation of due diligence processes related to human
rights and the environment, focusing on actions carried out by companies in order to
prevent, mitigate or remedy potential adverse consequences of their operations.
According to the literature, one of the key achievements of the UNGPs has been to shift
the approach to business and human rights from a retrospective liability for corporate
violations to a proactive one designed to prevent adverse human rights impacts via due
diligence. The results below show the presence of human rights and environmental
language in due diligence processes, confirming the shift towards proactive efforts.
However, there are also discrepancies between levels of stakeholder perception of
human rights and environmental language in due diligence processes: stakeholder
respondents declare the use of a human rights or environmental language more often
than companies, with gaps that range from 5% to 25%. Also, the actual levels of due
diligence practices confirmed by companies may demonstrate gaps in transparency or
coherence, as the practices that take place –based on companies’ responses– do not
match the results for the kind of language that is employed or whether certain measures
are expressly included.
The latter –a gap in transparency or coherence– is more likely. Regarding different types
of human rights and environmental due diligence areas, the survey shows that 70.85%
of companies claim to have undertaken human rights and environmental due diligence
compared to the 46.6% that use direct human rights language to classify due diligence
practices. Moreover, both survey respondents demonstrated vagueness of due diligence
language as a significant proportion suggested that companies use the denomination
“Sustainability Due Diligence” or other language to describe their processes (according to
66.7% of mentions by stakeholders and 32.4% of mentions by companies). Thus,
discrepancies between actual practices and the language that is used to describe them
may lead to under/overestimate due diligence actions performed by companies.
478
On the other hand, the literature proposes the possibility of corporations passing the
burden of due diligence down the supply chain.1428 Existing studies on supply chain
practices indicate that such contractual clauses are often equated with supply chain due
diligence practices. In this context, the frequency of vague language or other
alternatives to describe human rights or environmental due diligence could likewise
demonstrate instances where companies have not themselves established specific
human rights or environmental due diligence frameworks, but contract suppliers that
have established such practices down the supply chain. However, insofar as not much
data exists on how companies classify and label their specific practices, the analysis can
only be speculative.
The responsibilities of business enterprises are defined in Guiding Principle 13,1429 which
establishes that business enterprises have a responsibility to: avoid causing or
contributing to adverse human rights impacts through their own activities; seek to
prevent or mitigate human rights impacts that are directly linked to their operations,
products or services by their business relationships, even if they have not contributed to
those impacts.
As such, according to the literature, the analogy between the ‘corporate responsibility to
respect’ in the second pillar of the UN Guiding Principles and the tort of negligence in
domestic jurisdictions1430 represents possible opportunities for rights-holders to draw on.
Considering the usefulness of the UNGPs due diligence standard as a legal standard of
care1431, there may be direct opportunities for rights-holders who suffers harms as a
result of companies’ failure to exercise due care. However, despite these similarities with
the legal standard of care, the country reports of this study show that there are very few
examples of cases where the UNGPs or its due diligence expectations were successfully
relied on by claimants to demonstrate binding legal obligations.
In the areas of labour rights, health and safety, and non-discrimination and equality may
present the greatest opportunities to meet human rights standards as 87%-95% of
companies responded they clearly state such human rights aspects as a matter of their
due diligence practices, as well as some form of environmental due diligence. It is noted
that these areas are already, for the most part, highly regulated as domestic level. In
many case, these domestic laws also provide those affected with statutory remedies.
This suggests a strong consistency between corporate practices and regulation, insofar
as the areas where most companies are already undertaking due diligence are the areas
where laws already impose liability if harms were to take place.
Finally, regarding climate-related issues, the limited use of the term “climate change due
diligence”, as well as the low proportion of exclusive environmental/climate change due
diligence practices (7%), show that the companies are not currently undertaking free-
standing or exclusive environmental and climate-related due diligence. Conversely, a
greater proportion of companies declare that they explicitly mention climate change
1428 Jonathan Bonnitcha, Robert McCorquodale, The Concept of ‘Due Diligence’ in the UN Guiding Principles on Business and
Human Rights, European Journal of International Law, Volume 28, Issue 3, August 2017, Pages 899–919. Retrieved from:
https://doi.org/10.1093/ejil/chx042 1429 Ibid. 1430 Sanders, Astrid, The Impact of the 'Ruggie Framework' and the United Nations Guiding Principles on Business and Human Rights on Transnational Human Rights Litigation (June 23, 2014). LSE Legal Studies Working Paper No. 18/2014. Retrieved
from: https://ssrn.com/abstract=2457983 1431 Aftab, Yousuf. "The Intersection of Law and Corporate Social Responsibility: Human Rights Strategy and Litigation
Readiness for Extractive-Sector Companies." Proceedings of 60th Annual Rocky Mountain Mineral Law Institute (2014): 19-1.
Retrieved from: https://www.business-humanrights.org/sites/default/files/documents/YAftab-
Rocky%20Mountain%20Final%20%282014%29.pdf
479
among the environmental aspects covered through due diligence (60%). This result
shows that despite not using climate change language to refer to more general due
diligence processes/actions, climate change is a specific concern among companies. Also,
a considerable proportion of companies include climate implicitly (40%), indicating that
climate-related actions are conceptualised as a sub-aspect of environmental due
diligence.
Due diligence language referring to human rights and the environment
Both human rights and environmental concerns are extensively present in the language
used to describe due diligence processes.
Regarding human rights terminology, the majority of stakeholders noted that companies
describe their due diligence processes as “Human Rights Due Diligence” (54%), and the
majority of businesses likewise confirmed that they describe their due diligence
processes as “Human Rights Due Diligence” (32%). Thereafter, the second and third
most used language of the given options for due diligence processes are “Social,
Environmental and Human Rights Due Diligence” (according to 36% of stakeholder
respondents, and 14% of business respondents) and “Sustainability Due Diligence”
(according to 30% of stakeholder respondents and 14% of business respondents).
However, 37% of stakeholders and 19% of businesses noted that companies use other
language to describe their processes.
In the case of environmental terminology, descriptions often include language involving
environmental aspects linked to human rights and social impacts, among both
stakeholders (19% - 36%) and companies (5% - 14%). “Sustainability” is also a term to
refer to due diligence processes in both types of participants, although stakeholders
perceive it to be more frequently used (22% - 30% among stakeholders) than
companies use it to describe their own practices (7% - 14% among companies). A
noteworthy finding is that climate change is the least commonly employed denomination
among both types of actors (7% for stakeholders and 1% for companies).
480
Figure 8.8: Due diligence language referring to human rights and environment
Q12 Business Survey; 148 responses – Q10 Stakeholder Survey; 183 responses.
Current practices
Regarding current due diligence processes carried out by companies, near 78% of
companies have undertaken due diligence for human rights or environmental impacts. A
significant portion of companies (34%) carry out due diligence in specific areas related to
human rights, which may or may not include environmental issues. Only 7.4% indicate
that they have carried out exclusive environmental or climate change due diligence
activities without extending them to other human rights. Overall, most companies (37%)
indicated that they undertake due diligence involving all human rights (including
environment).
32.4%
2.0%
14.2%
1.4%
13.5%
4.7%
7.4%
5.4%
18.9%
“Human rights due diligence”
“Human rights due diligence including
environmental aspects”
“Sustainability due diligence”
“Climate change due diligence”
“Social, environmental and human rights due
diligence”
“Due diligence for human rights and/or
environmental impacts”
“Due diligence for sustainability impacts”
“Due diligence for social, labour,
environmental and …
Other (please specify)
0% 20% 40% 60% 80% 100%
Business responses
54.1%
17.5%
30.1%
6.6%
35.5%
29.5%
22.4%
18.6%
36.6%
“Human rights due diligence”
“Human rights due diligence including environmental …
“Sustainability due diligence”
“Climate change due diligence”
“Social, environmental and human rights due
diligence”
“Due diligence for human rights and/or
environmental …
“Due diligence for sustainability impacts”
“Due diligence for social, labour,
environmental and …
Other (please specify)
0% 20% 40% 60% 80%100%
Stakeholder responses
481
Table 8.46: Current human rights and environmental due diligence practices
Answer Choices Business
Human rights due diligence, but only in certain areas (for example health & safety,
labour, non-discrimination & equality, environmental, land rights & indigenous
communities)
33.71%
Human rights due diligence which takes into account all human rights (including
environment) 37.14%
Environmental/climate change due diligence (not extending to other human rights) 7.43%
My company does not / has not yet undertaken any form of due diligence for any
human rights or environmental impacts 7.43%
Do not know 14.29%
Q10 Business Survey; 175 responses.
Human rights and environmental aspects covered by companies’ due diligence
Both human rights and environmental aspects are perceived by companies to be
expressly or implicitly included in their due diligence processes. Labour rights, health and
safety, non-discrimination and equality, and income inequality are those that are more
often (55% - 95%) stated as expressly included within due diligence. Land rights,
indigenous communities, and progressive profit-shifting appear more frequently (58% -
74%) as implicit aspects of due diligence. Regarding the environment, climate change,
air pollution or greenhouse gas emissions, and the environment in general are those that
more often (60% - 86%) are stated to be expressly included in due diligence.
Biodiversity appears more frequently (55.2%) as an implicit aspect of due diligence.
482
Figure 8.9. Human rights and environmental aspects covered by companies’
due diligence
Q11 Business Survey; 133 responses.
Impacts on Public Authorities
As described in the Regulatory Review, due diligence requirements have already been
introduced or proposed in some EU Member States (e.g. France, Germany, and UK). It is
expected that mandatory due diligence requirements will increasingly be introduced or at
least considered by some EU Member States and outside of the EU, but that not all
Member States will introduce similar laws or any laws at all.
Unfortunately, it cannot reasonably be predicted what the scope and coverage of these
different types of national legislation will be, i.e. what it would cover in terms of issues,
companies or sectors, and whether it would be mandatory or voluntary, etc. Therefore, it
is not possible to provide precise cost estimates for measures that follow the status quo
at national level and assess what administrative burden would be created for public
authorities in EU Member States.
It can be assumed that a situation in which different Member States apply different laws
with different requirements and a different scope could create an administrative burden
at the EU level, as EU bodies may need to follow and monitor national initiatives and
possibly facilitate some type of information exchange. However, it can be expected that
this would be covered by existing operational structures and budgets since this would be
a normal process of monitoring policy developments in Member States.
94.96%
92.31%
87.29%
85.84%
77.88%
60.20%
54.76%
44.83%
41.86%
36.05%
25.86%
5.04%
7.69%
12.71%
14.16%
22.12%
39.80%
45.24%
55.17%
58.14%
63.95%
74.14%
Labour rights
Health & safety
Non-discrimination & equality
Environment
Air pollution / greenhouse gas…
Climate change
Income inequality
Biodiversity
Indigenous communities
Land rights
Profit-shifting to lower-tax…
0% 20% 40% 60% 80% 100%
Expressly mentioned
483
Option 2: New voluntary guidelines / guidance
Social Impacts
The results from the online survey reveal different perceptions among the different
stakeholder groups regarding the possible social impacts from option 2:1432 While a large
majority of stakeholder respondents (67%) expects no social impacts from new
voluntary guidelines, only 35% of the business respondents think that there would not
be any social impacts. In contrast, 26% and 40% of the stakeholder respondents and
business respondents, respectively, think it is likely that such new guidelines would have
a social impact. This indicates that business stakeholders may have a more positive
expectation about the potential impacts of new voluntary guidelines compared to general
stakeholders. Looking at different sub-groups of respondents within the stakeholder
group, 45% of respondents from civil society/NGOs and 9% of respondents from
industry organisation expect no social impacts from new voluntary guidelines. In
contrast, only 8% and 22% of each group (civil society and industry organisations,
respectively) expect positive social impacts.
Figure 8.10: Expected social impacts for Option 2
Q25 Business Survey; 113 responses – Q20 Stakeholder Survey; 149 responses.
Work conditions and labour rights
1432 Question 25 from Business Survey and Question 20 from Stakeholder Survey. For the full results please see the Annex.
40.71% 35.40%
23.89% 25.50%
67.11%
7.38%
Yes, it is likely to havesocial impacts
No, it is unlikely to havesocial impacts
Do not know / No opinion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Business
Stakeholders
484
The potential impacts on working conditions in the EU and non-EU countries for this
option depend on the extent to which due diligence measures will be implemented as a
result of new voluntary guidance. There is already a large amount of existing regulation
and guidance on basic labour rights and/or working conditions. The more detailed and
implementable the new voluntary guidance is, the higher is the likelihood that firms will
follow the standards set out in the guidelines and consider described problems or employ
suggested approaches. In general, however, it is expected that this option does not have
any impact or – if at all - a very small social impact since such new guidelines would
remain voluntary and there is already a large amount of binding law at both national and
international level as well as international standards and voluntary guidance in this area
(such as by the International Labour Organisation) which firms can take into account.
Expected positive social impacts
When asked in the survey about different areas of social impacts and whether positive,
negative or no impacts were expected from introducing new voluntary guidelines, both
groups revealed similar expectations. It has to be noted, however, that only those
respondents who indicated that the option is likely to have social impacts or had no
opinion on this were asked a more detailed question about which social impacts. As a
result, only 18% of all stakeholder respondents answered this question at all, and thus
the results have to be read with reservations since they may not necessarily be
representative of the views of all participants in the survey. Moreover, it is important to
keep in mind that respondents were surveyed on the basis of general questions without
details about the elements of each option.
The two main areas where mainly positive impacts were expected were related to child
labour and forced labour: 73% of stakeholder respondents and 60% of business
respondents expect mainly positive impacts from this option for the effective abolition of
child labour and 71% and 59%, respectively, expect positive impacts for the elimination
of all forms of forced or compulsory labour.
In relation to broader social impacts and impacts related to work and employment
conditions, the areas where expectations for positive impacts were highest were the
elimination of discrimination in respect of employment and occupation (59% of business
respondents, 61% of general stakeholders), improvements on the freedom of association
and effective recognition of the right to collective bargaining (52% of business
respondents, 50% of general stakeholders) and general improvements on employment
conditions/the quality of jobs (50% of business respondents, 52% of general
stakeholders). The third category of impacts where general stakeholders expect positive
impacts (51% of non-business stakeholders) are improvements regarding the transition
from informal to formal employment.
Table 8.47. Overview of the main areas of social impact where positive impacts
are expected (Option 2)
Social Impact
Expectation of positive impact
(rather than neutral or negative)
Business
respondents General stakeholders
485
Effective abolition of child labour 73% 60%
Elimination of all forms of forced or
compulsory labour 71% 59%
Elimination of discrimination in
respect of employment and occupation 59% 61%
Freedom of association and effective
recognition of the right to collective
bargaining
52% 50%
Quality of jobs 50% 52%
Transition from informal to formal
employment 43% 51%
Q26 Business Survey; 61 responses – Q21 Stakeholder Survey; 45 responses.
Employment
For the same reasons as described in option 1, it is expected that the introduction of new
voluntary guidance would not have an impact on employment levels. It is not expected
that such guidelines would have a negative impact on EU production volumes and
therefore no negative impact for EU employment levels (nor for employment levels in
third countries) is expected. The introduction of new guidelines could potentially create
some new jobs in the field of CSR if a company specifically hires someone to implement
such guidelines. However, it can be expected that this effect would be very small since
companies interested in pursuing voluntary CSR activities will already have specialised
staff for CSR activities and familiarisation with an additional guideline can be expected to
be covered with existing structures and staff.
Concerning the number of jobs both groups of respondents mainly expect a neutral
impact from the introduction of new voluntary guidelines (48% of business respondents,
66% of general stakeholders), i.e. they do not expect any impact.
Impacts on Human Rights
The potential impacts on human rights for this option depend on the extent to which
companies will adopt due diligence as a result of new voluntary guidance. While
voluntary, there is significant literature that speaks to the possibilities of reputational
pressures for companies to comply with voluntary due diligence. For example, the EU
Assessment of Due Diligence Compliance Cost, Benefit and Related Effects on Selected
Operators in Relation to the Responsible Sourcing of Selected Minerals (2014)1433 found
1433 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Available at: https://eur-lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-
01aa75ed71a1.0001.01/DOC_1&format=PDF
486
that as voluntary certification based on OECD Guidance can be expected to have indirect
benefits for rights holders as it would encourage demand for ethically and legitimately
sourced minerals. This demand can escalate and lead to formalised mining sectors, more
sustainable development and benefits for local communities.
Below we present the perceptions of companies and stakeholders regarding general and
specific human rights impacts of the implementation of new voluntary guidelines.
The majority of both stakeholders and companies foresee that the new voluntary
guidelines are likely to have positive impacts. While over 60% of stakeholders predict
most positive impacts to focus on the rights of the child, the rights of indigenous
persons, the right to physical/mental health, to not be subject to torture, and the right
to non-discrimination/equality, companies predict impacts on their supply chain could
most likely regard the right to non-discrimination/equality (71%), the right to life, liberty
and security of person (69%), and the right to physical/mental health (67%).
Interestingly, the two human rights duties where both stakeholders and companies
foresee most positive impacts of voluntary guidelines are in line with those that are most
often already perceived by business respondents as expressly covered by companies’
due diligence processes: health and safety and non-discrimination and equality (section
3.1.3). As these areas are highly regulated already, these findings suggest that new
voluntary guidance will simply inform and improve companies’ due diligence practices
which they are carrying out in response to existing laws. However, those areas
mentioned as implicitly included in due diligence processes, were also foreseen by the
majority of stakeholders and companies to be subject to a likely positive impact,
although to a lesser degree. While voluntary due diligence mechanisms do not, by
themselves, create new law, there are nevertheless legal risks stemming from the
adoption or introduction of voluntary guidance. (Lindsay et al. (2013).
As such, it is not surprising that very few respondents expected new voluntary guidelines
to have a negative rather than positive impact on human rights. Notably, the highest
number of respondents that foresaw a negative impact are companies, expecting
negative impacts on the Right of the Child (6.7%) and Women’s Rights (6.7%).
However, guiding principles risk providing companies with procedural rather than
operational leverage to comply with human rights norms. As an example described in the
Regulatory Review, the largest gold mine in Latin America, led by a Canadian company,
shows policy commitment to human rights norms and due diligence requirements, but
continues to be a cause of negative human rights impacts in the city of Paracatu,
Brazil1434. While the company adheres to international guidance on human rights, local
communities still claim to be impacted by health, infrastructural and environmental
damages. According to Turke, this demonstrates that without support from the company
complying with the requirements, and the proper institutional infrastructure to allow
affected rights-holders to seek remedy from a company, mandatory due diligence is in
fact at risk of not achieving its intended impacts.
Expected human rights impacts
The majority of stakeholders considered it unlikely that new voluntary guidelines on due
diligence through the supply chain would have any human rights impacts (68.5%). Only
1434 Ibid.
487
22.2% of stakeholders foresee that the voluntary guidelines on due diligence are likely to
have an impact on the enjoyment of human rights. The remaining subset of stakeholders
(9.4%) did not know or did not have an opinion regarding the likelihood that new
voluntary guidelines impact (or not) human rights. The majority of companies also
foresee that it is unlikely that new voluntary guidelines on due diligence through the
supply chain would have any human rights impacts (40%). However, the percentage of
businesses that believe that it is likely that such guidelines could have an impact on
human rights follows closely behind at 38.2%. Nevertheless, almost one in four
companies (21.8%) is not able to say whether voluntary new guidelines would have
human rights impacts or not. Both types of respondents differ most notably in their
expectations that impacts on human rights are unlikely.
Figure 8.11: Expected human rights impacts
Q29 Business Survey; 110 responses – Q24 Stakeholder Survey; 149 responses.
Specific impacts by human rights area
Most stakeholder respondents considered that new voluntary guidelines could have
positive impacts on global value chains regarding the right to life, liberty and security of
person as well as on freedom from slavery (67% respectively). Additionally, over 60% of
respondents foresee positive impacts on the rights of the child, the rights of indigenous
persons, the right to physical/mental health, to not be subject to torture, and the right
to non-discrimination/equality. The areas where most stakeholders expect neutral
impacts are the rights to own property (55%), to freedom from arbitrary arrest (47.5%),
and to education (45%). Very few (0% to 5%) of respondents expect a negative rather
than positive or neutral impact.
In regards to companies, respondents indicated that new voluntary guidelines could have
positive impacts on their supply chain regarding the right to non-discrimination/equality
(71%), the right to life, liberty and security of person (69%), and the right to
physical/mental health (67%). Over 60% of respondents expect positive impacts on the
rights of the child, the right to freedom from slavery and to peaceful
assembly/association. Similar to stakeholder respondents, the areas where most
companies foresee neutral impacts are the right to own property, to freedom from
22.2%
68.5%
9.4%
38.2% 40.0%
21.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on human rights
No, it is unlikely to haveimpacts on human rights
Do not know / No opinion
Stakeholders
Businesses
488
arbitrary arrest, and the right to education. Very few (0% to 6%) of respondents expect
a negative impact, rather than a positive or neutral impact.
489
Table 8.48: Specific impacts by human rights area
Stakeholders Businesses
Negative Neutral Positive No opinion / don't know Negative Neutral Positive No opinion / don't know
Right to Life, Liberty and Security of Person 2.56% 17.95% 66.67% 12.82% 2.22% 20.00% 68.89% 8.89%
Right to Physical / Mental Health 2.56% 25.64% 61.53% 10.26% 2.22% 22.22% 66.66% 8.89%
Right to not be subject to Torture 2.56% 25.64% 61.54% 10.26% 2.17% 26.09% 58.70% 13.04%
Right to Freedom of Opinion/Expression 5.00% 37.50% 45.00% 12.50% 2.22% 35.56% 55.56% 6.67%
Right to Non-Discrimination / Equality 5.00% 25.00% 60.00% 10.00% 4.44% 17.78% 71.11% 6.67%
Right to own Property 2.50% 55.00% 22.50% 20.00% 2.22% 48.89% 37.78% 11.11%
Right to freedom from Slavery 2.56% 20.51% 66.66% 10.26% 4.44% 22.22% 64.45% 8.89%
Right to Freedom from Arbitrary Arrest 2.50% 47.50% 25.00% 25.00% 4.44% 42.22% 35.55% 17.78%
Right to Privacy 5.00% 47.50% 30.00% 17.50% 4.44% 31.11% 48.89% 15.56%
Right to Peaceful Assembly / Association 5.00% 32.50% 42.50% 20.00% 2.22% 31.11% 60.00% 6.67%
Right to Education 2.50% 45.00% 37.50% 15.00% 4.44% 40.00% 44.45% 11.11%
Rights of the Child 2.56% 23.08% 64.10% 10.26% 6.66% 20.00% 62.22% 11.11%
Women's Rights 5.00% 25.00% 57.50% 12.50% 6.66% 17.78% 66.67% 8.89%
Rights of Indigenous Persons 5.00% 22.50% 62.50% 10.00% 4.44% 26.67% 55.55% 13.33%
Rights of People with Disabilities 5.00% 27.50% 52.50% 15.00% 4.26% 21.28% 57.45% 17.02%
Q25 Stakeholder Survey; 41 responses. Q30 Business Survey; 47 responses.
490
Environmental Impacts
The potential environmental impacts this option depend on the extent to which
companies will adopt due diligence as a result of new voluntary guidance. In line with
the reasoning behind positive impacts for rights holders, there is likewise significant
literature that speaks to the possibilities of reputational pressures for companies to
comply with voluntary due diligence for environmental protection. Identical findings as
those for the human rights analysis resulted from the EU Assessment of Due Diligence
Compliance Cost, Benefit and Related Effects on Selected Operators in Relation to the
Responsible Sourcing of Selected Minerals (2014)1435 when assessing potential for
voluntary guidance to impact environmental sustainability. The study found that
voluntary certification based on OECD Guidance would have indirect positive
environmental impacts based on reputation as this option would encourage demand for
sustainably sourced minerals, leading to formalised mining sectors, more sustainable
development and environmental protection. Below we present the perceptions of
companies and stakeholders regarding general and specific environmental impacts of the
implementation of new voluntary guidelines as conveyed through the online survey.
A large proportion of stakeholder respondents foresee that the new voluntary guidelines
are unlikely to have environmental impacts. On the other hand, companies are more
evenly distributed between the different expectation options, showing a high level of
uncertainty. Voluntary guidelines that address human rights and environmental issues
are already available (e.g. the OECD Guidelines, and Guidance on Climate-related
Information1436). However, new voluntary guidelines by their nature are unlikely to be
legally binding or enforceable. Taking this into account, the participants’ expectations are
consistent with their evaluation of the current situation, i.e. an extended need for a
common regulation.
Stakeholders and companies who foresee environmental effects identify similar areas
that are likely to have positive impacts. The most relevant is environmental air pollution,
followed by waste, water resources and greening of the economy. Areas where
respondents show diverging expectations are energy use and mix, and forests. Again,
companies show more uncertainty regarding specific impacts, probably because some of
them are beyond the scope of their business operations, or the knowledge of the
individual respondent.
The uncertainty and low expectations regarding the impact of new voluntary guidelines
on the environment coincide with the warnings issued on the Report of the Special
Rapporteur on extreme poverty and human rights, 'Climate change and poverty'1437,
which states that overreliance on voluntary private sector efforts could lead to an
extremely unequal situation regarding the consequences of climate change. The report
stresses that while there is no doubt that corporate actors must play a role in providing
and implementing solutions to climate change, they are not likely to be capable of
1435 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Available at: https://eur-lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-01aa75ed71a1.0001.01/DOC_1&format=PDF 1436 European Commission. 2019. "Guidelines on Reporting Climate-Related Information". Brussel. Retrieved from:
https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf 1437 Office of the United Nations High Commissioner for Human Rights. 2019. "Report of the Special Rapporteur on Extreme
Poverty and Human Rights. Climate Change and Poverty." Retrieved from:
https://www.ohchr.org/EN/HRBodies/HRC/RegularSessions/Session41/Documents/A_HRC_41_39.docx
491
promoting a comprehensive approach that ensures the conditions necessary for climate
change mitigation.
Expected environmental impact
Most general stakeholders considered it unlikely that new voluntary guidelines on due
diligence through the supply chain would have any environmental impact (69%). Only
19% of general stakeholders foresee that the voluntary guidelines on due diligence are
likely to have an impact on the environment. The remaining subset of general
stakeholders (13%) did not know or did not have an opinion regarding the likelihood that
new voluntary guidelines impact (or not) the environment. Most companies also foresee
that it is unlikely that new voluntary guidelines on due diligence through the supply
chain would have any environmental impact (41%). Nonetheless, the percentage of
businesses that believe that it is likely that such would guidelines have an impact on the
environment is at 34%. Finally, one in four companies (25%) is not able to say whether
voluntary new guidelines would have environmental impacts or not.
Figure 8.12: Expected environmental impacts under Option 2
Q27 Business Survey; 112 responses – Q22 Stakeholder Survey; 149 responses.
Specific impacts by environmental area
Both stakeholders and companies considered that the new voluntary guidelines could
have positive impacts on their global value chains regarding environmental air pollution
(61% - 63%). Also, more than 50% among both actors expect positive impacts on
waste, water resources and greening of the economy. The areas where stakeholders and
companies have diverging expectations regarding positive impacts correspond to energy
use and mix (43 versus 54% respectively) and forests (55% versus 45% respectively).
Uncertainty regarding the impacts on different areas is higher among companies that in
stakeholders, more than 20% of companies declare that they do not know or have no
opinion on potential impacts.
18.8%
68.5%
12.8%
33.9%
41.1%
25.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on theenvironment
No, it is unlikely to haveimpacts on theenvironment
Do not know / No opinion
Stakeholders
Businesses
492
Table 8.49: Specific impacts by environmental area
Stakeholders Businesses
Negative Neutral Positive No opinion / don't know Negative Neutral Positive No opinion / don't know
Environmental Air Pollution 0.0% 15.0% 62.5% 22.5% 2.0% 16.3% 61.2% 20.4%
Waste 0.0% 22.5% 57.5% 20.0% 2.0% 18.4% 59.2% 20.4%
Energy use and mix 0.0% 40.0% 42.5% 17.5% 2.1% 22.9% 54.2% 20.8%
Transport 0.0% 27.5% 55.0% 17.5% 2.0% 34.7% 42.9% 20.4%
Water Resources 0.0% 22.5% 57.5% 20.0% 2.0% 22.5% 57.2% 18.4%
Biodiversity 2.5% 30.0% 50.0% 17.5% 2.0% 30.6% 44.9% 22.5%
Agricultural Fertilisers 7.5% 20.0% 55.0% 17.5% 2.0% 20.4% 49.0% 28.6%
Forests 2.5% 25.0% 55.0% 17.5% 2.0% 24.5% 44.9% 28.6%
Fisheries 2.5% 32.5% 40.0% 25.0% 0.0% 28.6% 38.8% 32.7%
Greening of the Economy 2.4% 19.5% 51.2% 26.8% 2.0% 22.0% 50.0% 26.0%
Q23 Stakeholder Survey; 41 responses. Q28 Business Survey; 50 responses.
493
Impacts on public authorities
A potential cost which may arise for public authorities is the cost of drafting the new
guidelines and communicating it at the EU and national levels. Depending on the aspired
content and scope of the new guidelines, an external study may be necessary, which
based on the costs of a similar study is estimated at a cost of 200,000-300,000 EUR.1438
In the Impact Assessment regarding the EU Conflict Minerals Regulation it is estimated
that the cost of promoting a new communication via national contact points and the
Enterprise Europe Network (EEN) is equivalent to 0.05 full-time equivalent (FTE).1439 It is
not possible to estimate the precise figures in Euros of salary expectations based on
available data. Moreover, the exact costs of the 0.05 FTE estimation would depend on
the level of expertise required from the person(s) in post. In this, regard, it is noted that
the Conflict Minerals Regulation applies only to limited issues in a limited sector, and that
more time may be required if the due diligence requirements applies to a larger set of
companies and sectors. Due to their voluntary nature, new voluntary guidelines are
unlikely to be legally binding or enforceable. As a result, there are no additional costs
expected for the judicial system.
Option 3: New regulation requiring due diligence reporting
Social Impacts
Survey results show that half of both groups of stakeholders do expect social impacts
from an introduction of mandatory reporting requirements on due diligence through the
supply chain1440: 52% of non-business stakeholders and 50% of the business
respondents think that there would be a social impact from new reporting requirements
on due diligence. Only 38% of non-business stakeholders and 22% of business
respondents do not expect any social impacts. Looking at different sub-groups of
stakeholders, 24% of respondents from civil society/NGOs and 20% of respondents from
industry organisation expected social impacts from this regulatory option, while 29% and
5%, respectively, did not expect any social impact. However, it has to be pointed out
that the large majority of both groups (44% and 66%) did not respond to this question.
1438 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. PART 1 (Impact Assessment). Full external report available at https://publications.europa.eu/en/publication-detail/-
/publication/dced6d04-92fb-4a20-a499-4dad9974aee7 01aa75ed71a1.0001.01/DOC_3&format=PDF 1439 A full-time equivalent (FTE) is a unit to measure employed persons in a way that makes them comparable although they
may work a different number of hours per week. The unit is obtained by comparing an employee's average number of hours
worked to the average number of hours of a full-time worker. Eurostat. 1440 Question 34 from Business Survey and Question 28 from Stakeholder Survey. For the full results please see the Annex.
494
Figure 8.13: Expected social impacts for Option 3
Q34 Business Survey; 107 responses – Q28 Stakeholder Survey; 148 responses.
Work conditions and labour rights
The potential impacts on working conditions in the EU and non-EU countries as well as
labour rights depend, on the one hand, on the extent to which social issues will be
included and detailed in the reporting requirements, and, on the other hand, to the
extent that mere reporting requirements are able to enact changes in companies’
policies.
It can be expected that, similar to the previous option 2, the more issues related to
employment and working conditions are expected to be included in company’s reports,
and the higher the likelihood of consequences for a failure to report, the higher is the
likelihood that companies will report comprehensively on these issues. This may lead
them to a more thorough consideration within companies of the underlying problems and
risks and can increase the likelihood that actions are taken despite the fact that the
regulation only requires reporting.
For example, the EU Non-Financial Reporting Directive (NFRD) requires reporting on
companies’ policies related to social responsibility and treatment of employees1441, which
can include a description of employee related policies such as retention, compensation,
training and promotion. In the Impact Assessment1442 of the NFRD it is argued that this
increased transparency on employee- and human capital matters could potentially
improve employment relations, and that it could enhance the equality of treatment and
opportunities for different groups of people (gender, age, nationality, background, etc.).
1441 European Commission (n.d.). Non-financial reporting. Available at: https://ec.europa.eu/info/business-economy-
euro/company-reporting-and-auditing/company-reporting/non-financial-reporting_en. 1442 See commission staff working document impact assessment accompanying the document proposal for a directive of the
european parliament and of the council amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-
financial and diversity information by certain large companies and groups. Available at https://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52013SC0127.
50.47%
22.43% 27.10%
52.03%
37.84%
10.14%
Yes, it is likely to havesocial impacts
No, it is unlikely to havesocial impacts
Do not know / No opinion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Business
Stakeholders
495
The Impact Assessment also finds that affected companies would be encouraged to
better identify potential risks relating to human rights, including labour rights.
The Alliance for Corporate Transparency project1443 analyses the implementation of the
EU NFRD by assessing how European companies disclose information on their
sustainability impact. The purpose of this three-year research project is to analyse the
corporate disclosure on sustainability issues by the 1000 largest companies operating in
the EU. In their first report, the Alliance for Corporate Transparency assessed the reports
of 105 European companies from the Energy, ICT and Health Care sectors in 2018. The
results show that reporting by these companies varies significantly across companies.
Regarding social, employee and human rights, the results show that although 54% of
companies describe their policies in general, only 38% specify key issues and targets.
Moreover, only 37% and 50%, respectively, of the companies describe their due
diligence process and outcomes related to social, employee and human rights. In
contrast, the risks seem to be described relatively well: 45% of companies described
general risks and an additional 35% describe specific risks, while 55% included also risks
related to business partners and supply chains. The authors conclude that although most
companies at least present some non-financial information and acknowledge the
importance of environmental and social issues, only for less than 40% of companies the
information on social and anticorruption matters is “clear in terms of concrete issues,
targets and principal risks”.
Moreover, a survey1444 conducted in 2016 among companies which were subject to the
UK’s enhanced non-financial reporting requirements showed that only 15% of the
participating companies experienced a change in their business policies/approach to
employee matters over the last two years, since the introduction of the EU NFRD into
Member State law. Of these companies 44% attributed the changes to the non-financial
reporting requirements. A small share of companies (7%) also indicated that they
experienced a change in their business policies/approach to social and community
matters, and the large majority (67%) attributed the changes to the reporting
requirements. Although the share of companies which has seen a change in their policies
in response to the reporting requirements remains small, it suggests that mere reporting
requirements could be able to also induce a change in companies’ policies.
In an Impact Assessment1445 on the Australian Modern Slavery Reporting Regulation it is
expected that the reporting requirements will have a positive impact on work conditions
also in third countries, as the regulation is expected to reduce modern slavery risks in
the supply chains of Australian goods and services. It is argued that the reporting
requirements will set clear standards for action and will facilitate a ‘race to the top’
amongst business, which will make it more likely that companies comply with the due
diligence requirements and that social impacts take place.
1443 Alliance for Corporate Transparency Project (2019). 2018 Research Report. Available at:
https://www.allianceforcorporatetransparency.org/. 1444 The Impact of Non-Financial Reporting, IFF-Belmana survey interim results, commissioned by the Department for Energy
and Industrial Strategy in 2016. Cited in: UK Government (2016). Impact Assessment (IA) NFRD, No: BISCFA001. Available at: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=2ahUKEwiR_-
qdne_jAhVIIlAKHRi1BGcQFjAAegQIAhAC&url=https%3A%2F%2Fassets.publishing.service.gov.uk%2Fgovernment%2Fuploads
%2Fsystem%2Fuploads%2Fattachment_data%2Ffile%2F575540%2FNFRD_impact-assessment-
_final_August_2016.pdf&usg=AOvVaw2I0OypxJ-4sfx-veRd2bGP. 1445 Australian Government, Department of the Prime Minister and Cabinet (2018). Modern Slavery Reporting Requirement.
Available at: https://ris.pmc.gov.au/2018/07/18/modern-slavery-reporting-requirement.
496
Overall, it is expected that mandatory reporting requirements could have some impacts
on working conditions as well as labour rights, if these issues are expected from
company reports in the reporting requirements. However, this is based on the
assumption that public reporting raises reputational costs for misbehaviour, and thereby
increases pressure not only to report but to substantively improve the underlying
practices about which companies are required to report. The reporting requirements
could therefore encourage companies to better identify and address potential risks
concerning work conditions (and labour rights) and incentivise them to improve these
not only in the EU itself but also in third countries where legal requirements regulating
social impacts are weak or weakly enforced.1446
However, it is also important to keep in mind that under a reporting requirement
companies are merely required to report on their policies and activities, but that they are
not legally required to take actions to improve work conditions in their supply chains. As
a result, reporting requirements have a limited ability to influence changes in companies’
actions and policies. Moreover, as set out in the Regulatory Review, reporting
requirements usually do not impose sanctions on the failure to report or for reporting
human rights violations, which usually leads to low levels of implementation.
Expected positive social impacts
Most of the business respondents to the survey1447 expect positive impacts along their
supply chains related to working conditions such as the elimination of discrimination in
respect of employment and occupation (64%), the social dialogue (58%), as well as the
quality of jobs (56%). Again, stakeholder views are relatively similar to those of the
business respondents: Positive impacts are also expected by many stakeholders for the
social dialogue (59%), for the quality of jobs (57%) and the freedom of association and
effective recognition of the right to collective bargaining (55%).
However, many respondents also expect positive impacts on basic human and labour
rights, the same as for option 2: 62% of business respondents and 65% of stakeholder
respondents expect positive impacts on the effective abolition of child labour, while 59%
of business respondents and 65% of stakeholder respondents expect positive impacts for
the elimination of all forms of forced or compulsory labour.
1446 University of Edinburgh (2010). Study of the Legal Framework on Human Rights and the Environment Applicable to European Enterprises Operating Outside the European Union. Available at: http://ec.europa.eu/enterprise/policies/sustainable-
business/files/business-human-rights/101025_ec_study_final_report_en.pdf. 1447 Again, it has to be pointed out that only those respondents who indicated that the option is likely to have social impacts or
had no opinion were asked the more detailed question about which social impacts. Also, as stated before, it is important to
keep in mind that respondents were surveyed on the basis of general questions without details about the elements of each
option.
497
Table 8.50: Overview of the main areas of social impact where positive impacts
are expected (Option 3)
Social Impact
Expectation of positive impact
(rather than neutral or negative)
Business respondents General stakeholders
Effective abolition of child labour 62% 65%
Elimination of all forms of forced or
compulsory labour 59% 65%
Elimination of discrimination in respect
of employment and occupation 64% 54%
Social dialogue 58% 59%
Quality of jobs 56% 57%
Freedom of association and effective
recognition of the right to collective
bargaining
49% 55%
Q35 Business Survey; 66 responses – Q29 Stakeholder Survey; 83 responses.
Employment
Regarding the impact on employment, it can be argued that a mandatory reporting
requirement could increase potentially the number of jobs related to CSR and
compliance, if new mandatory reporting requirements would create more work.
However, it is noted that the EU NFRD and other reporting requirements already exist,
and that many companies are already expected to provide the required information in
company reports. As such, the number of additional jobs which may be created as a
result of a mandatory reporting requirement is expected to remain very limited. It is not
expected that potential additional costs for a company due to the reporting requirements
would be of an extent that this could lead to a considerable negative economic impact on
companies and a resulting decrease in production jobs.
The results from the survey are mixed: Concerning the number of jobs, business
respondents to the survey mostly expect a positive impact (40%, as opposed to a
neutral impact (35%), negative impact (5%), or no opinion (21%)), whereas non-
business stakeholders mostly expect (56%) a neutral impact (as opposed to a positive
impact (18%), negative impact (5%) or no opinion (21%)).
498
Impact on Human Rights
The potential impacts of reporting requirements on human rights depend on not only the
extent to which human rights will be included and detailed in the reporting requirements,
but additionally on the ability to measure such rights as well as on their ability to enact
changes in companies’ policies. There is significant literature that speaks to the
opportunities made available by establishing reporting requirements for companies to
comply with their duties. For example, the EU Commission Impact Assessment on the EU
NFRD Proposal (2013)1448 found that introducing the requirement for companies to
disclose material relating to social, human rights and anticorruption aspects as well as
boards' diversity would have a beneficial impact on fundamental rights. Including such
measures in the in the existing Accounting Directives would encourage EU companies to
regularly review their policies and internal procedures in various aspects, mainly due to a
larger public scrutiny. Not only can such reporting requirements be expected to have
indirect positive impacts such as on the workers' right to information (Article 27 of the
Charter of Fundamental Rights of the EU137) they can additionally be expected to have
direct positive effects on companies’ awareness of human rights. By specifically requiring
companies to disclose risks in the field of human rights, reporting requirements can
translate into a reduction EU company involvement in incidents of human rights
violations. Disclosure of company policy relating to diversity and gender equality can
lead to dialogue within the company and catalyse the promotion of the right to non-
discrimination (Article 21 of the EU Charter) and the right to equality between women
and men (Article 23). According to the Impact Assessment, such reporting requirements
could even extend positive impacts to the freedom to choose an occupation and the right
to engage in work (Article 15), as well as in the longer term on the freedom of
expression and information (Article 11).
Benefits linked to increased awareness of human rights can go beyond the development
of measures to protect fundamental rights within a firm. A potential indirect effect of
human rights awareness – which are linked to reputational issues mentioned in Option 2
– is the increased concern for establishing partnerships up and downstream the supply
chain with companies that share these concerns and build strategies to make their
business models compatible with a human rights perspective.1449 This potential benefit is
consistent with the views presented in the interviews about current practices, in which
respondents highlight the efforts that they have carried out to spread due diligence
across their different units and how a comprehensive approach to due diligence may
increase opportunities to work with partners that implement sustainable business-
models.
However, as reporting requirement’s impacts on human rights are dependent on their
ability to enact changes in companies’ policies, below we present the perceptions of
companies and stakeholders regarding general and specific human rights impacts of the
implementation of a new regulation requiring due diligence reporting.
1448 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives 78/660/EEC and 83/349/EEC
as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013SC0127 1449 Xu, L., Kumar, D.T., Shankar, K.M. et al. (2013). Analysing criteria and sub-criteria for the corporate social responsibility-
based supplier selection using AHP. International Journal of Advanced Manufacturing Technology, 68(1-4), pages 907-916.
https://doi.org/10.1007/s00170-013-4952-7
499
The effectiveness of reporting requirements in increasing protection for rights-holders is
a frequently debated topic. While reporting requirements are frequently perceived to be
procedural requirements which do not lead to substantive impacts, the majority of
stakeholders foresee reporting requirements to have positive impacts for rights-holders
regarding the right to freedom from slavery (67%) and non-discrimination/equality
(64%). Accordingly linked, over 60% of respondents likewise expected such
requirements to hold companies responsible to respect their human rights duties
concerning women’s rights, the rights of indigenous persons, and the rights of the child.
Moreover, the majority of companies also indicated that new regulatory reporting
requirements could have positive impacts on their supply chain regarding the rights of
the child (68%), and the right to freedom from slavery (67%).
However, according to Source Intelligence (2014),1450 companies’ respect for their
human rights duties is not necessarily affected by reporting requirements because
companies already recognize that public opinion is overwhelmingly in favour of
transparency in the responsible production of goods. As such, companies should be
expected to voluntarily provide transparent reporting of their respect for human rights as
a tool to gain consumer acceptance.
Thus, on one hand, companies are confident that reporting requirements will have
positive human rights impacts, specifically on the rights of the child (68%) and the right
to freedom from slavery (67%). It is noted that many business survey respondents
would already be subject to the EU NFRD and other corporate reporting requirements in
their Member States (which are discussed in the Regulatory Review). As such, reporting
requirements can be foreseen to have a positive human rights impact mainly relating to
those companies not already reporting, and only if compliance and transparency
mechanisms are to be put in place and properly enforced.
A 2018 study by Alliance for Corporate Transparency1451 assessed whether companies
provided the type of information explicitly required by the Non-Financial Reporting
Directive (NFRD), which includes sustainability, human rights, and environmental
factors. The study found that over 90% of companies express in their reports a
commitment to respect human rights and over 70% endeavour to ensure the protection
of human rights even in their supply chains. This is in line with our survey responses
where 46.6% of companies use direct human rights language to classify their due
diligence practices and 70.85% of companies claim to have undertaken human rights
due diligence. However, according to the 2018 study, a majority of companies they
surveyed, do not provide any information that would allow a stakeholder to understand
how this commitment is put into practice. Only 36% describe their human rights due
diligence system, 26% provide a clear statement of salient issues and 10% describe
examples or indicators to demonstrate effective management of those issues.
Similarly in the retail sector, a study by Deakin University and Queensland University of
Technology investigated workplace human rights disclosure practices by 18 major
Australian garment and retail companies that source products from developing nations.
1450 Source Intelligence works to bring transparency and visibility to the supply chains of companies around the world. The goal is to provide an environment through platform technology where suppliers, partners, vendors, small businesses, and global
brands have the ability to proactively address their compliance and transparency needs. 1451 Alliance for Corporate Transparency Project, "2018 Research Project: The state of corporate sustainability disclosure under
the EU Non-Financial Reporting Directive", at 6, available at:
http://www.allianceforcorporatetransparency.org/assets/2018_Research_Report_Alliance_Corporate_Transparency-
66d0af6a05f153119e7cffe6df2f11b094affe9aaf4b13ae14db04e395c54a84.pdf (last accessed on 5 March 2019).
500
The investigators found that the reviewed corporations only reported less than half of
the specific disclosure categories, confirming that the lack of transparency enforcements
in reporting requirements act as barriers to significant benefits for rights-holders.1452
Interestingly, the areas where the majority of both stakeholders and companies expect
neutral impacts are the right to privacy and the right to own property (42-47%
respectively). The neutrality of these duties may be due to the slightly lower relevance of
such rights in the work place relative to the rights of the child and the right to freedom
from slavery, or the difficulties in ensuring the enjoyment of such rights via reporting
requirements.
Finally, very few (0% to 5%) of respondents expect a negative impact, rather than a
positive or neutral impact. The literature suggests that as reporting requirements might
not have a significant impact on companies that already perceive the value of
transparent reporting for their consumer base, impacts will focus most on those
companies that do not willingly report.
Expected human rights impacts
When stakeholders and companies were asked whether the introduction of new
regulatory reporting requirements for due diligence through the supply chain would have
an impact on human rights, responses differed among the surveyed population. Almost
half of all stakeholders and companies surveyed agreed that the introduction of such
requirements is likely to have an impact on human rights, where stakeholders were
slightly more skeptical about the impact (48%) than businesses (55.2%). The difference
between both groups is starker when looking at those that do not foresee reporting
requirements to have an impact on human rights, with 39.9% of stakeholders holding
that perspective, versus 18.1% of companies, who were more likely to state no opinion
(26.7%).
Figure 8.14: Expected human rights impacts under Option 3
Q38 Business Survey; 105 responses – Q32 Stakeholder Survey; 148 responses.
1452 Azizul Islam, Muhammad, and Ameeta Jain. "Workplace human rights reporting: a study of Australian garment and retail
companies." Australian accounting review 23, no. 2 (2013): 102-116. Retrieved from:
https://onlinelibrary.wiley.com/doi/pdf/10.1111/auar.12009
48.0%
39.9%
12.2%
55.2%
18.1%
26.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on human rights
No, it is unlikely to haveimpacts on human rights
Do not know / No opinion
Stakeholders
Businesses
501
Specific impacts by human rights areas
The majority of stakeholder respondents considered that new regulatory reporting
requirements could have positive impacts regarding the right to freedom from slavery
(67%) and to non-discrimination/equality (64%). Additionally, over 60% of respondents
foresee positive impacts on women’s rights, the rights of indigenous persons, and the
rights of the child. The areas where most stakeholders expect neutral impacts are the
right to privacy and to own property (46% respectively), and the right to freedom from
arbitrary arrest (41%). Very few (0% to 2.5%) of respondents expect a negative rather
than positive or neutral impact.
The majority of companies indicated that new regulatory reporting requirements could
have positive impacts on their supply chain regarding the rights of the child (68%), and
the right to freedom from slavery (67%). Over 60% of respondents expect positive
impacts on the right to not be subject to torture and the right to life, liberty and security
of person. Similar to stakeholder respondents, the areas where most companies foresee
neutral impacts are the right to own property (47%) and the right to privacy (42%).
Very few (0% to 5%) of respondents expect a negative impact, rather than a positive or
neutral impact.
502
Table 8.51. Specific human rights impacts by area (Option 3)
Stakeholders Businesses
Negative Neutral Positive No opinion / don't know Negative Neutral Positive No opinion / don't know
Right to Life, Liberty and Security of Person 0.00% 27.50% 53.75% 18.75% 1.49% 22.39% 59.70% 16.42%
Right to Physical / Mental Health 0.00% 26.58% 56.96% 16.46% 1.49% 25.37% 56.72% 16.42%
Right to not be subject to Torture 0.00% 35.44% 48.10% 16.46% 1.52% 21.21% 63.64% 13.64%
Right to Freedom of Opinion/Expression 2.53% 32.91% 48.10% 16.46% 4.55% 31.82% 50.00% 13.64%
Right to Non-Discrimination / Equality 1.28% 20.51% 64.10% 14.10% 4.62% 27.69% 56.92% 10.77%
Right to own Property 1.27% 45.57% 29.11% 24.05% 3.03% 46.97% 30.31% 19.70%
Right to freedom from Slavery 1.27% 17.72% 67.09% 13.92% 2.98% 19.40% 67.16% 10.45%
Right to Freedom from Arbitrary Arrest 1.28% 41.03% 32.05% 25.64% 2.99% 37.31% 40.30% 19.40%
Right to Privacy 0.00% 45.57% 34.18% 20.25% 1.52% 42.42% 37.88% 18.18%
Right to Peaceful Assembly / Association 0.00% 27.85% 54.43% 17.72% 1.52% 33.33% 54.55% 10.61%
Right to Education 1.27% 37.97% 43.03% 17.72% 1.52% 31.82% 51.51% 15.15%
Rights of the Child 0.00% 22.78% 62.03% 15.19% 1.52% 18.18% 68.18% 12.12%
Women's Rights 1.27% 21.52% 63.29% 13.92% 1.52% 25.76% 59.09% 13.64%
Rights of Indigenous Persons 1.27% 21.52% 63.29% 13.92% 3.03% 25.76% 53.03% 18.18%
Rights of People with Disabilities 0.00% 35.00% 48.75% 16.25% 2.94% 27.94% 50.00% 19.12%
Q33 Stakeholder Survey; 81 responses. Q39 Business Survey; 70 responses.
503
504
Environmental Impacts
The potential environmental impacts of reporting requirements depend on not only the
extent to which they will be included and detailed in the reporting requirements, but
additionally on the taxonomy used as well as on their ability to enact changes in
companies’ policies. There is significant literature that speaks to the opportunities made
available by establishing reporting requirements for companies to act responsibly
towards the environment. For example, the EU Commission Impact Assessment on the
EU NFRD Proposal (2013)1453 found that positive impacts on environmental awareness
can be expected to increase via the improved transparency that reporting requirements
provide and better quality of information on companies’ environmental performance. This
would have an indirect positive environmental impact by increasing peer pressure and
raising reputational costs for misbehaviour, which would lead to improvements on
businesses’ conduct.
Complementing survey results with the interviewees’ views about the inclusion of
environmental and climate change in current due diligence practices, the results
illustrate that due diligence based on reporting guidelines such as UNGP have potential
positive effects on the internal and external scopes of action. On the internal level,
improved knowledge of the company and the supply chain – due to increased
transparency – may help overcome the silo mentality in businesses in which the different
units within a firm do not share goals, tools priorities and processes. On the external
level, interviews presented positive views indicating that as more firms adopted due
diligence frameworks based on the environment and human rights, companies tended to
find it easier to ‘cross-paths’ with other sustainable businesses.
Interviewees also noted that with the existing legal framework, a primary motivation to
undertake these types of due diligence is exposure to public scrutiny. The views shared
regarding due diligence practices in own operations indicate that there are neither
sufficient resources nor systematic efforts dedicated to implement comprehensive
programmes to prevent, mitigate or remedy potential environmental or human rights
impacts. Taking this into account, the extent and scope of disclosure instructed by due
diligence reporting requirement will indirectly condition businesses environmental
performance based on the capacity of the regulation to prompt the systematic adoption
of environmental and human rights due diligence.
Regarding these indirect positive effects, a study analysing the potential of the EUNFRD
to stimulate organisational change indicated that the capacity of the Directive to induce
ex-ante organisational learning and changing business conducts is weakened by its ex-
post accountability focus, in which sanctions are applied to non-disclosure, not
accuracy1454. In this sense, the authors recommend that reporting requirements clarify
the importance of management-anchoring of reporting as learning opportunities to
reduce internal and external risks. Additionally, emphasising the learning aspect of the
reporting process should entail interaction between firms and stakeholders to build
1453 See COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Council Directives 78/660/EEC and 83/349/EEC
as regards disclosure of non-financial and diversity information by certain large companies and groups. Available at
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013SC0127 1454 Buhmann, K. (2018). Neglecting the proactive aspect of human rights due diligence? A critical appraisal of the EU’s non-
financial reporting directive as a Pillar One avenue for promoting Pillar Two Action. Business and Human Rights Journal, 3(1),
pp. 23-45. Available at: https://doi.org/10.1017/bhj.2017.24
505
common frameworks that guide comprehensive due diligence processes to prevent
harm.
Below, we present the perceptions of companies and stakeholders regarding general and
specific environmental impacts of the implementation of a new regulation requiring due
diligence reporting. Compared to the new voluntary guidelines, where most of the
stakeholders declared that they did not expect any environmental impact, the new
regulation requiring due diligence reporting shows a stronger level of agreement
between companies and stakeholders on the likelihood of environmental impacts.
However, there is also a higher level of uncertainty, as more respondents prefer not to
give an opinion than in the previous option.
Like in Option 2, stakeholders and companies who foresee environmental effects identify
similar areas that are likely to have positive impacts, the most relevant is environmental
air pollution, followed by waste, and water resources. Areas where respondents show
diverging expectations are energy use and mix, and transport. As in the results for
Option 2, companies show more uncertainty regarding specific impacts, probably
because some of them are beyond the scope of their business operations or unknown to
the individual survey respondent. Additionally, this uncertainty is extended to
stakeholders, who refrain from identifying the type of impact at a higher rate compared
to the previous option.
Generally, reporting requirements have low levels of enforcement, as they do not impose
a sanction for non-compliance, nor do they provide for legal liability or access to remedy.
These characteristics might be one source of uncertainty, particularly when respondents
do not have information on how such regulation would be implemented.
With the current data, it is not possible to determine the specific concerns of companies;
however, recent reporting instances serve as examples of the extent of disclosure that
could be anticipated from corporate actors. For instance, the EU NFRD has two main risk
perspectives to guide the process of reporting potential effects on the environment and
climate change. On the one hand, the climate-related information should include the
principal risks to the development, performance and position of the company resulting
from climate change. On the other, companies should disclose the main risks of a
negative impact on the climate resulting from the company’s activities. Along the same
line, the new non-binding Guidelines on reporting climate-related information stress the
critical role of companies and financial institutions in the transition to a climate-resilient
economy. The Guidelines acknowledge the need for companies to better understand and
address the risks of negative impacts on the climate resulting from their operation.
Expected environmental impact
Most stakeholders (45%) and companies (41%) declared that they expect that new
regulation requiring due diligence reporting is likely to have an impact on the
environment. However, there is a significant proportion of stakeholders that indicate the
opposite (39%), whereas companies that do not expect environmental impacts are near
30%. Around 16% of stakeholders and 27% of companies are unable to tell whether
requiring due diligence reporting is likely to have impacts, indicating a considerable level
of uncertainty among both types of respondents.
506
Figure 8.15: Expected environmental impacts under Option 3
Q36 Business Survey; 105 responses – Q30 Stakeholder Survey; 148 responses.
Specific impacts by environmental area
Environmental air pollution and waste are the areas that most stakeholders (60%) and
companies (63%) expect to receive positive impacts from new regulation requiring due
diligence reporting. Areas with more than 50% of mentions by stakeholders and
companies are water resources (51% and 62% respectively) and greening of the
economy (51% and 56%). The areas where stakeholders and companies have diverging
expectations regarding positive impacts are energy use and mix (49% versus 62%) and
transport (42% versus 52%). Uncertainty regarding the impacts on different areas is
higher among companies that in stakeholders, near 30% of companies declare that they
do not know or have no opinion on potential impacts in 4 out of 10 areas, and near 25%
of stakeholders declare that they do not have an opinion in all areas.
44.6% 39.2%
16.2%
41.0%
32.4% 26.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on theenvironment
No, it is unlikely to haveimpacts on theenvironment
Do not know / No opinion
Stakeholders
Responses
507
Table 8.52: Specific impacts by environmental area (Option 3)
Stakeholders Businesses
Negative Neutral Positive No opinion / don't know Negative Neutral Positive No opinion/don't know
Environmental Air Pollution 0.0% 16.7% 60.3% 23.1% 1.9% 18.5% 63.0% 16.7%
Waste 0.0% 16.7% 59.0% 24.4% 1.9% 14.8% 64.8% 18.5%
Energy use and mix 0.0% 24.4% 48.7% 26.9% 1.9% 21.2% 61.5% 15.4%
Transport 0.0% 29.5% 42.3% 28.2% 3.7% 27.8% 51.9% 16.7%
Water Resources 0.0% 23.1% 51.3% 25.6% 3.8% 15.1% 62.3% 18.9%
Biodiversity 0.0% 28.2% 46.2% 25.6% 1.9% 22.6% 45.3% 30.2%
Agricultural Fertilisers 1.3% 19.2% 53.9% 25.6% 3.8% 20.8% 47.2% 28.3%
Forests 1.3% 24.4% 50.0% 24.4% 5.7% 17.0% 47.2% 30.2%
Fisheries 2.6% 29.5% 39.8% 28.2% 1.9% 20.8% 43.4% 34.0%
Greening of the Economy 1.3% 17.7% 50.6% 30.4% 3.6% 18.2% 56.4% 21.8%
Q31 Stakeholder Survey; 79 responses. Q37 Business Survey; 56 responses.
508
Impacts on Public Authorities
Similar to Option 2, this option would most likely entail costs for an external study to
define the exact reporting requirements and draft guidelines on the implementation of
the reporting as well as promotion activities. In addition, this option may entail
personnel costs for staff at the EC providing guidance on the implementation, and
depending on the legal oversight required at EU level, may include conducting sample
reviews of due diligence reports. In the Impact Assessment regarding the Conflict
Minerals Regulation the costs for implementing guidance for voluntary to mandatory
regulatory options range from 1.5 to 2 FTEs. Again, it is noted that the scope of the
Conflict Mineral Regulation is limited to a certain sector and that a more general due
diligence requirement which applies to a larger set of companies would imply larger
costs.
Depending on the design of the new regulation, it may also be foreseen to create a
database either on Member State or EU-level to make relevant company reports easily
accessible to the public. This could create additional costs related to the set-up and
maintenance of this database, e.g. ongoing costs related to the collection of reports and
regular updating of the database. The financial implications estimated for the Australian
Modern Slavery Bill 20181455 include the establishment of an Anti-Slavery Business
Engagement Unit (BEU) which shall provide expert support and advice to business on
modern slavery risks and manage a central repository of modern slavery statements.
The cost for this is estimated at approximately 550,000 EUR1456 per year, which is
expected to allow for 5 employees (FTEs) which are responsible for 3,000 reporting
entities. The comparability of these cost estimates would largely depend on the number
of companies to which the new regulation would apply and the level of detail which
would be required in reports.
If an ex post study to assess the implementation and its effects may be required, this
would pose an additional estimated cost of 200,000-300,000 EUR. Reporting
requirements on non-financial matters do not usually imply access to judicial remedies
for external stakeholders in the case of failure to report, and therefore there are no
additional costs expected for the judicial system. At Member State level, reporting
requirements could lead to legal remedies for shareholders or regulatory sanctions in
terms of ordinary corporate law. It is assumed that these will be enforced in the usual
way and would not lead to additional costs for the state. However, this depends on the
potential design of the new regulation and its implementation at Member State level.
1455 Parliament of Australia, Department of Parliamentary Services (2018). Modern Slavery Bill 2018. BILLS DIGEST NO. 12,
2018–19. Retrieved from:
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2F6150516%22 1456 The Australian Government allocated 3.6 million Australian Dollars over four years in the 2018-19 Budget for the
establishment of an Anti-Slavery Business Engagement Unit (BEU).
509
Option 4: New regulation requiring mandatory due diligence as a legal
duty o care
Social impacts
A large majority of business and stakeholder respondents expects social impacts from a
new regulation requiring mandatory due diligence:1457 86% of stakeholder respondents
and 66% of the business respondents think that there would be a social impact from
mandatory due diligence. Only 4% of stakeholders and 12% % of the business
respondents do not expect any social impacts from this regulatory option. Looking at
specific sub-groups of stakeholders, 52% of respondents from civil society/NGOs and
18% of respondents from industry organisations expected social impacts. Again, a large
share of respondents did not provide any response (44% and 68%, respectively).
Figure 8.16: Expected social impacts under Option 4
Q45 Business Survey; 102 responses – Q38 Stakeholder Survey; 147 responses.
Work conditions and labour rights
It is likely that social impacts will be highest if mandatory due diligence requirements are
introduced. As set out in the Regulatory Options, a mandatory regulation on due
diligence would require a company to identify and assess ongoing and potential impacts,
act upon the findings, assess the effectiveness of the actions taken and report on these.
For example, the French Vigilance Law requires companies to develop and implement a
due diligence plan1458 and to identify and prevent human rights violations and
environmental damages in connection with their operations, which includes actions to
1457 Q45 in the Business Survey and Q38 in the Stakeholder Survey. For the full survey results, please see the Annex. 1458 “The plan shall include the reasonable vigilance measures to allow for risk identification and for the prevention of severe
violations of human rights and fundamental freedoms, serious bodily injury or environmental damage or health risks resulting
directly or indirectly from the operations of the company and of the companies it controls within.” Source: European Coalition
of Corporate Justice (2016). French Corporate Duty of Vigilance Law (English Translation). Available at:
http://www.respect.international/french-corporate-duty-of-vigilance-law-english-translation/.
65.69%
11.76%
22.55%
86.39%
4.08% 9.52%
Yes, it is likely to havesocial impacts
No, it is unlikely to havesocial impacts
Do not know / No opinion
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Business
Stakeholders
510
mitigate identified risks and mechanisms to assess measures that have been
implemented. The law covers due diligence measures to identify risks and prevent
“violations of human rights and fundamental freedoms, serious bodily injury or
environmental damage or health risks”. As the French law has only been adopted in
2017, and litigation in terms of the Act has not yet been brought, it is too early for any
comprehensive assessments of its implementation and effects. The non-profit
organisation Shift has issued a first report1459 on human rights reporting in France, which
aims to assess in how far the French legislation has a positive impact on the reporting
activities. However, for the moment only the baseline report exists and the second
report assessing possible improvements as a result of the legislation has not yet been
issued.
Therefore, for the moment only anecdotal evidence can be assessed. One example of a
CSR report1460 describes measures taken under the French Vigilance Law in three main
areas: integrity and employee engagement, safety and environmental stewardship. The
report lists measures related to the learning, pay policy and inclusion policy, gender
equality, employee relationship, and their safety measures. Such measures could
improve the working conditions of workers within the company, its subsidiaries and the
companies which it controls. However, it is not known whether these measures were
really taken in response to the Vigilance Law.
Under this option the social impacts also depend to a large extent on how the regulation
is implemented and enforced. Labour rights and working conditions are already regulated
at both national and international level, but, as discussed in the Problem Analysis,
enforcement is problematic, particularly in supply chains and third countries. Insofar as
mandatory due diligence regulation would add a legally binding dimension to these
existing expectations, it is likely to increase the practical uptake of those existing
standards, thereby improving the labour conditions in question.
Social impacts in third countries
Social impacts in third countries arising from a new mandatory due diligence also depend
on the scope of operations and business relationships which a company has in the third
country. It can be expected that mandatory due diligence requirements can lead to a
positive impact on labour rights in third countries since multinational companies affected
by the regulation would have global operations and value chains. These companies
would not only be required to identify and assess potential adverse impacts but would
also be obliged to comply with a certain standard of care in acting upon their findings
and monitoring their actions. Therefore, it can be expected that due diligence by EU
companies in their supply chains would support also a better compliance of the
companies in its supply chain with labour standards, for example if EU companies would
have codes of conduct for 1st tier suppliers and execute audits. Such requirements from
EU companies could also make it easier for the host countries of the supply chain
companies to implement labour standards in practice and thus support creating a level-
playing in the host country of the supply chain company.
1459 Shift (2018). Human Rights Reporting in France: A Baseline for Assessing the Impact of the Duty of Vigilance Law.
Available at: https://www.shiftproject.org/resources/publications/loi-vigilance/. 1460 XPO Logistics (2018). Corporate Social Responsibility Report. Available at:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=2ahUKEwj0iLCu9-
PjAhVHz6YKHUCNATAQFjAEegQIBBAC&url=https%3A%2F%2Fxpodotcom.azureedge.net%2Fxpo%2Ffiles%2FXPO_Logistics_20
18_CSR_Report.pdf&usg=AOvVaw0n6qH-A-N-V50SRsiZk9TL.
511
However, it could also be possible that companies only do the minimum, depending on
how the regulation is formulated. In this case they might just, for example, remove child
labourers, but would not necessarily take broader measures and take care of
remediation of negative impacts which they may have already caused. Another negative
impact could be that some European companies withdraw from (developing) third
countries where e.g. labour laws are infringed rather than addressing these issues,
although this is not the aim of the regulation. This might have negative employment
effects for the affected countries, and/or it could potentially lead to other companies
from countries with no or less restrictive regulations entering these markets, which
would have adverse impacts on the workers and working conditions in these countries.
In practice, however, it is unlikely that companies would be in a position to restructure
their global business model in such a significant way for this purpose. Similarly, the
literature has also shown that companies very rarely terminate their business
relationships (which includes exiting certain jurisdictions) based exclusively on social or
human rights-related concerns.1461
Expected positive social impacts
Business and stakeholder respondents have largely the same expectations as for options
2 and 3 regarding the areas in which to expect positive social impacts. Again, business
and stakeholder respondents mainly expect positive impacts on labour rights, i.e. the
elimination of all forms of forced or compulsory labour (78% and 85%, respectively),
and the effective abolition of child labour (77% and 85%, respectively). 1462
The other areas where they largely expect positive social impacts are: the elimination of
discrimination in respect of employment and occupation (74% of business respondents
and 79% of stakeholders), the quality of jobs (67% of business respondents), wages
(78% of stakeholders) and the freedom of association and effective recognition of the
right to collective bargaining (67% of business respondents and 83% of non-business-
respondents). Although these were also largely the areas where positive social impacts
were expected for options 2 and 3, the share of respondents expecting positive impacts
(rather than negative or neutral impacts) is higher for option 4. Very few respondents
indicated that they expect negative social impacts.
Table 8.53: Overview of the main areas of social impact where positive impacts
are expected (Option 4)
Social Impact
Expectation of positive impact
(rather than neutral or negative)
Business
respondents General stakeholders
1461 McCorquodale, R., Smit, L., Neely, S., & Brooks, R. (2017). Human Rights Due Diligence in Law and Practice: Good
Practices and Challenges for Business Enterprises. Business and Human Rights Journal, 2(2), 195-224.
doi:10.1017/bhj.2017.2. Available at: https://www.cambridge.org/core/journals/business-and-human-rights-journal/article/human-rights-due-diligence-in-law-and-practice-good-practices-and-challenges-for-business-
enterprises/0306945323DD6F6C9392C5DBDE167001 1462 Again, it has to be pointed out that only those respondents who indicated that the option is likely to have social impacts or
had no opinion were asked the more detailed question about which social impacts. Also, as stated before, it is important to
keep in mind that respondents were surveyed on the basis of general questions without details about the elements of each
option.
512
Effective abolition of child labour 77% 85%
Elimination of all forms of forced or
compulsory labour 78% 85%
Elimination of discrimination in
respect of employment and occupation 74% 79%
Quality of jobs 67% 78%
Wages 61% 78%
Freedom of association and effective
recognition of the right to collective
bargaining
67% 83%
Q46 Business Survey; 74 responses – Q39 Stakeholder Survey; 130 responses.
Employment levels
On the one hand, a new regulation could have negative impacts on employment levels if
affected EU companies would become less competitive vis-à-vis competing companies
from third countries with less restrictive due diligence requirements due to the increased
economic burden from new mandatory due diligence requirements. This could especially
be the case in the short run when companies would face increased cost from adapting
and re-organising their supply chains while not yet benefiting from positive reputational
effects as described below. If such an economic burden would lead to companies
reducing their production, this would also have a negative impact on employment levels.
Since option 4 is the most ambitious option, it is also the option where negative impacts
on employment levels could take place most likely. However, this depends on how large
the economic burden would be for each company as discussed above in the section on
economic impacts.
On the other hand, there could also be positive impacts on employment levels within and
outside of the EU, especially in the long run. First, there could be additional jobs created
related to the new due diligence policies since the implementation of company policies
regarding work conditions or labour rights might require more staff and staff with
specialised expertise. The number of additional jobs created is expected to be higher
than under option 3, as under this option companies do not only need to report on their
activities, but they also need to have a comprehensive assessment of their supply chains
and need to implement measures to address potential problems. Concrete numbers for
employment effects were only possible to be calculated for large companies and are
described under option 4.2(a), which is applicable to large companies only. However,
these effects are expected to take place also for all other options which would apply to
large companies, i.e. 4.1 for large companies in specific sectors, all sub-options of 4.2
and also sub-options 4.3.
Second, a new regulation could have a positive impact on employment levels if due
diligence activities increase the reputation of a company and as a result increase the
demand for its products as well as its competitiveness vis-à-vis companies from
513
countries with less strict due diligence requirements. As a result of the latter two, these
companies could increase their production and therefore their demand for labour. This
could especially be the case for companies which are seen as frontrunners in regard to
their due diligence activities and which manage to communicate their achievements well
as they would benefit most from reputational effects.
The survey results indicate that respondents mostly expect positive or neutral impacts
on employment levels from option 4. However, it is important to point out that the
survey question did not specify whether the potential impacts were expected in the short
or long term. Overall, most respondents expect positive impacts on the number of jobs
(40% of business respondents and 45% of stakeholders), but there is also a large
number which expects neutral impacts on the number of jobs (37% of business
respondents and 34% of stakeholders). Only a very small share (4% of each group)
expects negative impacts on the number of jobs, while 19% and 17% of business and
stakeholder respondents, respectively, have no opinion.
Sub-option 4.1: Narrow category of businesses (limited by sector)
The social impacts of this sub-option depend, on the one hand, on the general factors
described for option 4, i.e. on the scope and implementation of the new regulation. On
the other hand, the social impacts of this option depend on the choice of sectors to
which the regulation will be applicable. It can be assumed that social impacts would be
higher if the regulations would cover sectors in which work conditions are considered to
be relatively bad and in which labour rights tend to be enforced less well, or sectors
which source heavily in countries which are known for bad work conditions and labour
markets where labour rights do not exist or are not enforced. In order to assess which
sectoral coverage would provide most social benefits an in-depth study would be
necessary. One indicator for high-risk sectors where it could be expected that social
impacts may be high are the OECD’s sector-specific guidelines which accompany the
general Due Diligence Guidance for Responsible Business Conduct. The OECD provides
sector-specific due diligence for the following sectors: Minerals and mineral supply
chains, garment and footwear, agriculture, extractives, financial sector.1463 Another
indicator could be a large study by the European Foundation for the Improvement of
Living and Working Conditions1464 which assessed working conditions and job quality in
different European sectors. It concludes that European sectors vary considerably in
terms to the work conditions. Sectors which, according to the report, score relatively
poorly on the four considered indicators (earnings, prospects, intrinsic job quality and
working time quality) are: administrative services, the agro-food industry, food and
beverage services, textiles and clothing, transport and storage, and construction.
Concerning impacts on employment, the same considerations as discussed generally for
option 4 apply. Depending on the sectoral coverage of a new regulation and whether the
covered sectors employ more or less workers, the positive as well as negative impacts
on employment could be stronger. For such considerations the table below shows the
number of people employed in each industry sector in the EU. The two sectors in the EU
1463 OECD (2018). OECD Due Diligence Guidance for Responsible Business Conduct. Available at:
https://www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm. 1464 European Foundation for the Improvement of Living and Working Conditions (2014). Working conditions and job quality:
Comparing sectors in Europe. Available at: https://www.eurofound.europa.eu/publications/report/2014/working-
conditions/working-conditions-and-job-quality-comparing-sectors-in-europe-overview-report
514
which employ most workers are wholesale and retail trade; repair of motor vehicles and
motorcycles (15% of total employment) as well as manufacturing (14%).
Table 8.54: Overview of total employment in the EU by sector (in thousand
persons)
Sector 2015 Share
Agriculture, forestry and fishing 10,874.79 5%
Mining and quarrying 670.09 0%
Manufacturing 31,652.76 14%
Electricity, gas, steam and air conditioning supply 1,247.95 1%
Water supply; sewerage, waste management and
remediation activities 1,664.02 1%
Construction 14,544.00 7%
Wholesale/retail trade; repair of motor vehicles/
motorcycles 33,645.66 15%
Transportation and storage 11,398.58 5%
Accommodation and food service activities 11,367.91 5%
Information and communication 6,670.32 3%
Financial and insurance activities 5,979.23 3%
Real estate activities 2,537.86 1%
Professional, scientific and technical activities 14,099.69 6%
Administrative and support service activities 14,562.23 7%
Public administration/ defence; compulsory social
security 14,631.87 7%
Education 15,584.17 7%
Human health and social work activities 24,125.44 11%
Arts, entertainment and recreation 4,062.78 2%
Activities of households as employers;
undifferentiated goods- and services-producing
activities of households for own use
3,700.99 2%
515
Source: Eurostat, Total employment domestic concept
Sub-option 4.2: Horizontally across sectors
Social impacts for these options are expected to be those as generally discussed under
option 4. In addition, the level of expected social impacts of the different sub-options of
4.2 depend on the coverage of affected companies as described below.
Sub-option 4.2(a): Set of large companies
The social impacts of this sub-option depend on the number of companies to which the
new regulation would apply. Given that 99% of EU companies are SMEs (enterprises
employing less than 250 people)1465, it can be expected that this sub-option would only
apply to 1% of EU companies. However, this would depend on the definition of large
companies and/or the definition of the affected group of companies. It is also noted that
a significant number of these SMES are within the supply chains or value chains of the
1% of large companies. Insofar as the regulation would extend to due diligence through
the supply chain, the standard of care required would indirectly apply to the practices of
these SMEs through the large companies with which they do business.
It is assumed that this sub-option may lead to less social impacts than under sub-option
4.2(b) which covers the entire EU economy. Depending on the potential sectoral scope
under option 4.1, the expected social impacts of this sub-option could be roughly similar
as those expected under option 4.1 if the number of companies operating in the selected
sectors is small. Both options do not apply to the entirety of companies but a sub-set of
companies only.
We provide estimates for potential direct employment effects resulting from the
implementation of a new regulation requiring due diligence measures by large
companies. In order to calculate possible direct employment effects, annual cost
estimates from the firm-level economic impact assessment (see section on economic
impacts) were applied to calculate annual full-time equivalents (FTEs), i.e. the number of
additional jobs, which could be created under this option. The estimates are presented in
Table 8.55 below.
For the EU28, a new regulation requiring mandatory due diligence that would be applied
to only large companies with more than 250 employees could create about 10,000 jobs.
By comparison, a new regulation requiring new reporting requirements which would be
applied to only large companies with more than 250 employees could create about 759
jobs. If mandatory DD would be applied horizontally across sectors for all businesses
incl. SMEs, this regulation could create about more than 600,000 additional jobs in the
EU.
It should be noted that these estimates are based on the person-days per due diligence
activity which were indicated by the survey respondents. These estimates were applied
to calculate the additional annual cost impacts for firms based in the EU. It should noted
that these number have some limitations, which are outlined in the Section on firm-level
economic impacts. Accordingly, the estimated employment effects should be interpreted
with caution.
1465 Eurostat (2018). Statistics on small and medium-sized enterprises. Available at: https://ec.europa.eu/eurostat/statistics-
explained/index.php/Statistics_on_small_and_medium-sized_enterprises.
516
It should also be noted that there are likely to be countervailing effects, which can
impact on the net impact on employment: It can be assumed that not all companies
would hire new staff, but some companies would rather train existing staff (e.g. staff set
free from rationalisation measures). In addition, due to rising labour costs, some
companies may have to raise prices. Others, mainly smaller companies among the group
of (Eurostat-defined) large companies and companies with small profit margins, may
face profitability problems and may be driven out of business, which would reduce the
net impact of such a new regulation on overall employment. Those companies that have
to raise prices may face lower demand for their products and services, with adverse
effects on employment. And finally, companies may find it difficult to hire qualified
personnel, which moderates the total employment effect at least over the short- to
medium-term.
Table 8.55: Potential employment effects, EU28
Policy option / company
size
Additional annual firm-level cost, EU aggregate
Cost of one person-
day (8 hrs)
Cost of one person-month (20 man-days)
Cost of one full time
equivalent (FTE)
Number of FTEs derived from empirical estimates based on sum of man-days for individual activities
New reporting requirements
SMEs EUR 3,418,391,110
EUR 219.20
EUR 4,384.00
EUR 52,608.00
64,979
Large
companies
EUR
39,935,855
EUR
219.20
EUR
4,384.00
EUR
52,608.00 759
TOTAL 65,738
Mandatory DD throughout value chains
SMEs EUR 32,498,788,721
EUR 219.20
EUR 4,384.00
EUR 52,608.00
617,754
Large companies
EUR 543,451,881
EUR 219.20
EUR 4,384.00
EUR 52,608.00
10,330
TOTAL 628,084
Source: Own calculations based on business stakeholder survey and Eurostat data.
517
Table 8.56: Potential employment effects resulting for new mandatory DD throughout companies’ value chains, if applied only to large
EU companies (>250 employees)
Country Mandatory DD throughout
value chains
Empirical monthly labour
estimates based on sum
of person-days for
individual activities
Mandatory DD
throughout value
chains
Empirical monthly
labour cost estimates
based on total person-
day estimates
Labour costs
per hour
Cost of one
person-day
(8 hrs)
Cost of one
person-month
(20 person-
days)
Cost of one full
time equivalent
(FTE)
Number of FTEs
derived from empirical
estimates based on
sum of person-days
for individual
activities
Number of FTEs
derived from
empirical estimates
based on total
person-day
estimates
EU28 EUR
2,696,608,264
EUR
4,148,628,098
EUR
27.40
EUR
219.20
EUR
4,384.00
EUR
52,608.00
615,102 946,311
Austria EUR
79,535,248
EUR
122,361,920
EUR
34.00
EUR
272.00
EUR
5,440.00
EUR
65,280.00
14,620 22,493
Belgium EUR
75,138,761
EUR
115,598,094
EUR
39.70
EUR
317.60
EUR
6,352.00
EUR
76,224.00
11,829 18,199
Bulgaria EUR
7,047,734
EUR
10,842,668
EUR
5.40
EUR
43.20
EUR
864.00
EUR
10,368.00
8,157 12,549
Croatia EUR
8,908,962
EUR
13,706,096
EUR
10.90
EUR
87.20
EUR
1,744.00
EUR
20,928.00
5,108 7,859
Cyprus EUR
2,438,350
EUR
3,751,307
EUR
16.30
EUR
130.40
EUR
2,608.00
EUR
31,296.00
935 1,438
Czechia EUR
42,040,555
EUR
64,677,777
EUR
12.60
EUR
100.80
EUR
2,016.00
EUR
24,192.00
20,853 32,082
518
Denmark EUR
60,828,660
EUR
93,582,554
EUR
43.50
EUR
348.00
EUR
6,960.00
EUR
83,520.00
8,740 13,446
Estonia EUR
4,462,611
EUR
6,865,556
EUR
12.40
EUR
99.20
EUR
1,984.00
EUR
23,808.00
2,249 3,460
Finland EUR
42,541,363
EUR
65,448,251
EUR
33.60
EUR
268.80
EUR
5,376.00
EUR
64,512.00
7,913 12,174
France EUR
317,287,667
EUR
488,134,873
EUR
35.80
EUR
286.40
EUR
5,728.00
EUR
68,736.00
55,392 85,219
Germany EUR
870,073,467
EUR
1,338,574,565
EUR
34.60
EUR
276.80
EUR
5,536.00
EUR
66,432.00
157,166 241,795
Greece EUR
13,682,682
EUR
21,050,279
EUR
16.10
EUR
128.80
EUR
2,576.00
EUR
30,912.00
5,312 8,172
Hungary EUR
16,754,304
EUR
25,775,852
EUR
9.20
EUR
73.60
EUR
1,472.00
EUR
17,664.00
11,382 17,511
Ireland EUR
31,247,167
EUR
48,072,565
EUR
32.10
EUR
256.80
EUR
5,136.00
EUR
61,632.00
6,084 9,360
Italy EUR
190,504,762
EUR
293,084,249
EUR
28.20
EUR
225.60
EUR
4,512.00
EUR
54,144.00
42,222 64,957
Latvia EUR
3,931,668
EUR
6,048,720
EUR
9.30
EUR
74.40
EUR
1,488.00
EUR
17,856.00
2,642 4,065
519
Lithuania EUR
6,595,056
EUR
10,146,240
EUR
9.00
EUR
72.00
EUR
1,440.00
EUR
17,280.00
4,580 7,046
Luxembourg EUR
13,379,162
EUR
20,583,326
EUR
40.60
EUR
324.80
EUR
6,496.00
EUR
77,952.00
2,060 3,169
Malta EUR
478,911
EUR
736,786
EUR
14.70
EUR
117.60
EUR
2,352.00
EUR
28,224.00
204 313
Netherlands EUR
123,440,283
EUR
189,908,128
EUR
35.90
EUR
287.20
EUR
5,744.00
EUR
68,928.00
21,490 33,062
Poland EUR
70,660,974
EUR
108,709,190
EUR
10.10
EUR
80.80
EUR
1,616.00
EUR
19,392.00
43,726 67,271
Portugal EUR
24,043,554
EUR
36,990,082
EUR
14.20
EUR
113.60
EUR
2,272.00
EUR
27,264.00
10,583 16,281
Romania EUR
23,337,219
EUR
35,903,414
EUR
6.80
EUR
54.40
EUR
1,088.00
EUR
13,056.00
21,450 32,999
Slovakia EUR
13,454,608
EUR
20,699,397
EUR
11.60
EUR
92.80
EUR
1,856.00
EUR
22,272.00
7,249 11,153
Slovenia EUR
8,554,494
EUR
13,160,761
EUR
18.10
EUR
144.80
EUR
2,896.00
EUR
34,752.00
2,954 4,544
Spain EUR
143,361,168
EUR
220,555,643
EUR
21.40
EUR
171.20
EUR
3,424.00
EUR
41,088.00
41,870 64,415
520
Sweden EUR
80,380,334
EUR
123,662,053
EUR
36.60
EUR
292.80
EUR
5,856.00
EUR
70,272.00
13,726 21,117
United Kingdom EUR
363,488,181
EUR
559,212,586
EUR
27.40
EUR
219.20
EUR
4,384.00
EUR
52,608.00
82,912 127,558
521
Sub-option 4.2(b): All business, including SMEs
The social impacts of this sub-option would be the same as those described in the
general part under option 4, which describes an economy-wide application. It can be
expected that the social impacts would be the highest if a new regulation requires
mandatory due diligence which applies to all companies. However, as stated above, the
social impacts depend to a large extent on how the new regulation is implemented.
Labour rights or employee-related issues are already regulated to a large extend within
the EU and its Member States, but a binding duty may influence and improve the
implementation of these standards in practice.
Similarly, it can be expected that impacts (positive and negative) on EU employment
levels – as described under option 4 – would be most be significant under this option
given that the requirements would apply to all companies in the EU. The same is
expected for social impacts in third countries.
Sub-option 4.2(c): All business plus specific additional obligations only applying
to large companies
In addition to the social impacts expected for option 4.2(b), which are also generally
described under option 4, this sub-option would require specific requirements for large
companies. These could increase the social impacts compared to the previous options
4.1, 4.2(a) and 4.2(b). Where these additional social impacts would be expected,
depends on the areas for which additional obligations would be specified. If these
obligations would be specified in relation to environmental and climate change matters
such as in the Paris Agreement, no additional positive impacts would be expected for
work conditions, labour rights or other social matters. Concerning impacts on
employment levels, the same considerations as under option 4 apply, i.e. if such
additional obligations for large companies would constitute a significant economic
burden, there may be negative impacts on employment to be expected. However, given
the small share of large companies in the EU economy, this effect is expected to remain
small. As discussed under option 4, potentially positive effects for employment could be
created if improved due diligence regarding environmental and climate matters leads to
better reputation and thus increased sales and production. In addition, a small number of
new jobs may be created within these large companies for the purposes of climate
change due diligence, which is a new and developing area.
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory oversight and
/ or enforcement mechanism
It is noted that for a regulation to be “mandatory” it would need to be accompanied by
some form of legal consequence for non-compliance, whether state-based oversight and
/ or judicial or non-judicial remedies. As such, one of the sub-options in sub-option 4.3
would always accompany sub-options 1 and 2.
The same considerations regarding social impacts apply to this sub-option as for the
broad option 4.2(b) and those discussed generally under 4. It is expected that additional
enforcement mechanisms foreseen under this sub-option would not increase the level of
potential social impacts as such, since the due diligence requirements themselves would
remain the same. However, if the enforcement mechanism increases compliance with the
522
requirements, it will increase the likelihood that the expected social impacts come into
effect.
Sub-option 4.3(a): Mechanisms for judicial or non-judicial remedies
As stated above under 4.3, the same considerations regarding social impacts apply to
this sub-option as for the broad option 4.2(b) and those discussed generally under 4. In
addition, it can be assumed that compliance would increase under this option and
therefore it is more likely that the expected social impacts materialise. Social impacts
could increase if the mechanism for remedies allows for remedies which improve social
issues such as improving work conditions or improving labour laws. In the case that such
remedies would pose a very high economic burden1466 for companies, in theory this could
have a negative impact on employment levels.
Sub-option 4.3(b): State-based oversight body and sanction for non-compliance
Similar to sub-option 4.3 (a), the same considerations regarding social impacts apply to
this sub-option as for the broad option 4.2(b) and those discussed generally under 4. In
addition, it can be assumed that compliance is most likely under this option as it includes
an additional oversight body. It can be expected that the existence of such an oversight
body and potential sanctions could incentivise companies to comply with their due
diligence requirements regarding social matters. Therefore, it is expected that this sub-
option increases the likelihood that the expected social impacts materialise. However, as
discussed previously, this also depends on whether and how far social impacts are
specified in the requirements. Same as in option 4.3(a), in the case that such remedies
would pose a very high economic burden for companies, in theory this could have a
negative impact on employment levels.
Impact on Human Rights
The large majority of stakeholders considered that new regulation requiring mandatory
due diligence could have positive human rights impacts. Over 60% of respondents expect
positive impacts on all human rights areas, and the top areas – with above 80% of
responses- are the right to freedom from slavery, the rights of the child, women’s rights,
the right to non-discrimination/equality, the rights of indigenous persons, and the right
to life, liberty and security of person. Additionally, most surveyed companies considered
that new regulation requiring mandatory due diligence could have positive impacts on
their supply chains. Over 60% of respondents expect positive impacts on 9 out of the 15
human rights areas, and the top areas – with above 70% of responses- are the right to
freedom from slavery, the rights of the child, and women’s rights.
However, out of the 19 sectors surveyed, in only four areas did a majority of companies
confirm that they foresee mandatory due diligence requirements to have a positive
impact on human rights. However most economic sectors stated that mandatory due
diligence requirements would indeed have an impact down their supply chains to improve
the human rights situation. The discrepancy may be founded in the simple notion that
any plausible impacts on human rights depend on the scope of the mandatory directive,
and how many companies will unquestionably fall under its mandate. This is
demonstrated by the results of the EU Impact Assessment of Directive 2012/18/EU –
1466 Quantification of compensation awards are usually based on the damages suffered by the claimants, unless pecuniary damages are
awarded based on the bad faith or deliberately harmful conduct of the defendent.
523
Seveso III Directive1467 as the level of human rights impacts by every policy option
investigated was dependent on whether it would successfully cause an increase in the
number of establishments under its direction or a decrease. Where there is a decrease in
the number of establishments under the legislation, this might lead to a decrease in
human and environmental health protection. However, where there is an increase in
scope, this would lead to an increase in protection.
There is also a considerable amount of uncertain responses from stakeholders as to
whether mandatory due diligence would have a positive impact on human rights. This
may likewise be linked to the notion that mandatory requirements may put a company at
risk, which is also reflected in the Market Practices section, where companies have
expressed a concern that current due diligence practices may expose them to risks of
litigation.
As such, it is unsurprising that low levels of compliance go hand in hand with difficulties
in enforcing due diligence standards. A study conducted by Global Witnesses and
Amnesty International showed that many US companies are failing to comply with the
mandatory 2010 Dodd Frank Act. More specifically, the study analysed 100 conflict
minerals reports filed by US companies in response to the Act. This analysis found that
79 of these companies failed to meet the minimum requirements established by the law,
that only 16% of them were going beyond their direct suppliers to attempt to contact
those down the production chain, and that more than half of the companies sampled did
not report to senior management when they identify a risk in their supply chain. This is
in line with the findings of the EU Assessment of Due Diligence Compliance Cost, Benefit
and Related Effects on Selected Operators in Relation to the Responsible Sourcing of
Selected Minerals (2014)1468. When assessing possible impacts of Option 4 which requires
mandatory legality certification, the study found that the full reach of possible benefits
may be put at risk as companies may seek the easiest, least risky and burdensome way
of complying (avoiding sourcing from conflict-affected regions). This could trigger
negative impacts on local communities as mineral flows could be diverted towards
companies with lower standards and norms.
Moreover, a 2018 study demonstrates that even when companies do look beyond their
direct suppliers, audits that certify suppliers as compliant, even independent and high-
quality ones, are not sufficient to ensure that an approach is credible and has any
benefits for rights-holders (German Watch: Sydow J. & Reichwein A., 2018). The study
communicates that none of the assessed due diligence initiatives or guidelines for the
mineral sector met 100% of the criteria developed by German Watch to define it as fully
credible and transparency. When investigating down the supply chain beyond their direct
suppliers, requirements may incentivize companies to rely on faulty certification schemes
given to indirect suppliers as a confirmation of compliance. The concern of illegitimate
credibility via faulty certification was reiterated by the European Commission Impact
Assessment on Additional Options to Combat Illegal Logging (2008)1469,1470 as Option 4B,
1467 See COMMISSION STAFF WORLING PAPER. IMPACT ASSESSMENT Accompanying document to the Proposal for a DIRECTIVE OF THE
EUROPEAN PARLIAMENT AND OF THE COUNCIL on the control of major-accident hazards involving dangerous substances. Available at:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010SC1590&from=EN [Accessed 11 Sep. 2019]. 1468 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the European
Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of responsible importers of tin,
tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. PART 1 (Impact Assessment). Available at:
https://eur-lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-01aa75ed71a1.0001.01/DOC_1&format=PDF 1469 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL determining the obligations of operators who make timber and timber products available on the
Market. IMPACT ASSESSMENT Report on additional options to combat illegal logging. Available at:
https://ec.europa.eu/environment/forests/pdf/impact_assessment.pdf
524
which requires legality certificates, runs the risk of accepting such certificates from
countries which might be in violation of serious human rights abuses—and thus providing
them with illegitimate credibility.
As such, the study concludes that a robust mandatory due diligence regulation such as
the EU regulation on responsible mineral sourcing, or the US Dodd-Frank Act, must
ensure that it restricts companies from trusting their suppliers on the basis of their
certifications, and rather perform proper due diligence themselves to protect rights-
holders.
While requiring companies to report on child labour practices and working conditions
would naturally suggest a positive impact, compliance and transparency cannot be
ensured. According to Nolan J. (2018), without any mechanism to encourage compliance
with the legal requirements of transparency and due diligence, the uptake by companies
of due diligence requirements may be limited. This has played out in practice via the
implementation of the Modern Slavery Act in the UK. The introduction of civil (and
criminal) penalties where human rights violations have occurred would significantly
strengthen requirements.
Mandatory due diligence requirements risk suffering from low levels of effectiveness if
exposed to issues of certification quality, compliance, and additionally because
companies may not perceive due diligence requirements to prioritize risks to rights-
holders but rather prioritize risks to the company. After its mission to Brazil in 2015, a
United Nations working group report concluded that “human rights risks were mainly
seen as risks to a company’s operations, rather than risks faced by vulnerable rights-
holders”1471.
However, while recognizing challenges in real impact for rights-holders, evidence does
demonstrate that legislation can be designed in such a way to restructure the balance of
power and allow rights-holders to demand prioritization. For example, the European
Commission’s Report on the Implementation of the Environmental Liability Directive
(2016), demonstrates that a key added value of the ELD refers to the recognition of
stakeholder’s rights under the directive. According to Articles 7(4) and 12 of the ELD, a
person who could be affected by the damage, or with a legitimate interest, as well as
environmental NGOs, have rights to request the implementation of prevention and
remedial measures, by submitting the relevant information. The competent authority is
obliged to evaluate the request and to notify the requestor of the decision.
In addition, mandatory due diligence requirements have significant benefits, even when
less than 100% of companies comply. The Enough Project conducted field research in
2015 and 2016 in eastern Congo with miners, traders, human rights activists, civil
society leaders, and foreign industry experts, to assess impacts of the Dodd-Frank Act.
The investigation found direct positive impacts including increased security for civilians in
some mining areas and a significant reduction in armed group control in 3T mining areas.
Additionally, a few indirect advances for rights-holders were found around improved
safety and health standards for miners, and the implementation of a regional certification
system for mines as conflict-free. When 193 mines were assessed under this certification
1470 Indufor (2008). Assessment of the impact of potential further measures to prevent the importation or placing on the market of illegally
harvested timber or products derived from such timber. Final Report. [online] Helsinki, Finland: Indufor in association with European Forest
Institute (EFI). Available at: https://ec.europa.eu/environment/forests/pdf/ia_report.pdf [Accessed 10 Sep. 2019]. 1471 Turke M. (2018). Business and Human Rights in Brazil: Exploring Human Rights Due Diligence and Operational-Level Grievance
Mechanisms in the case of Kinross Paracatu Gold Mine. Brazilian Journal of International Law. (Vol. 15, No. 2). DOI:
10.5102/rdi.v15i2.5357
525
scheme in Eastern Congo to investigate conflict and child labour, 166 of the mines (86%)
successfully passed the assessment. Furthermore, according to the Enough Project
(2015), the year 2015 saw a record amount of certified conflict-free tantalum exported
from eastern Congo — a 387% increase since 2013. Moreover, looking at tin, tantalum,
and tungsten mines together, 70% of those investigated by the International Peace
Information Service in 2014 were conflict-free.
However, the high proportion of negative business responses, might also be explained by
the notion that the impacts of poorly designed mandatory due diligence requirements
may not necessarily be positive. The literature demonstrates that impacts for rights-
holders could result in unintended consequences when mandatory due diligence
obligations are imposed only for certain geographical regions, such as the Dodd Frank
act, as this allows businesses to move to other areas of supply where these due diligence
requirements do not apply. A study by the University of Texas School Of Law suggests,
Section 1502 of the Dodd-Frank Act essentially created a de facto embargo on the entire
mining industry in the DRC (Owen M., 2013). Companies found it simpler to withdraw
from the area rather than to justify business associations with conflict. This sudden
change caused the demand to drop by 90%, placing the economic burden on a vast
population of civilians that depended on the income for their livelihood. According to the
study, this has had negative impacts relating to the right to food, the right to education,
and the right to health (Owen M., 2013). However, this phenomenon could presumably
be linked to the mechanism’s narrow application to a specific geographical region, which
allows for superficial circumvention of the requirements. This is less likely to apply if the
due diligence requirements were imposed on a wider group of businesses operating
globally.
2016 study by the University of Wisconsin-Madison confirmed this argument, outlining
that while the conflict-minerals section of the 2010 Dodd-Frank Act has succeeded in its
mission of decreasing the financing of warlords and conflict in East Congo, it also
unexpectedly created a de facto boycott on mineral purchases. Estimating the impact on
the mortality of children born before 2013, the study finds that it increased the
probability of infant deaths in villages near the policy-targeted mines by at least 143
percent. Similar to the literature on burden allocation of economic sanctions, the paper
suggests that the Act’s boycott reduced mothers’ means to purchase health care goods
and services for their infants.1472
As such, the evidence of the efficacy of mandatory due diligence requirements seems to
suggest that as long as robust risk assessment (based on those affected), transparency,
monitoring, and compliance systems are enforced, and if the mechanism is designed to
avoid unintended consequences, such as through wide standardisation to avoid
circumvention, rights-holders can expect opportunities for protection.
Additionally, conditional on the definitions of offences, scope and enforcement
mechanisms of Option 4, the extent of the identified benefits will differ according to the
timeframe. Concerning short-term benefits, mandatory due diligence may result, for
example, in the termination of contracts with suppliers that do not comply with the
corresponding regulation. Moreover, if companies implement human rights due diligence
framework comprehensively, in the mid to long term, they may benefit from
1472 Dominic P. Parker & Jeremy D. Foltz & David Elsea, 2016. "Unintended consequences of economic sanctions for human rights Conflict
minerals and infant mortality in the Democratic Republic of the Congo," WIDER Working Paper Series 124, World Institute for Development
Economic Research (UNU-WIDER).
526
organisational learning that brings better business conduct with a focus on prevention
rather than on remediation of harms1473. This may lead to competitive advantages based
on an improved orientation towards stakeholders (communities, suppliers, customers and
employees), that in turn may increase shareholder value as well as creating financial and
social value in the long-term (i.e. sustainable business-models and supply chains)1474.
Human rights impacts in third countries
The effects of mandatory due diligence for rights holders in third countries are dependent
on the kind of business a company undertakes, the accountability and visibility of its
actions in the home country, and the existing relationships with the surrounding
community in the third country. Linked to the social impacts described above, positive
impacts are particularly possible for the right to the highest attainable standard of
physical and mental health for the effects on working conditions. Mandatory due diligence
requirements would hold EU companies accountable to identify and rectify labour
violations related to their global activities and possibly administered by suppliers in third
countries.
However, as is evident with both effects at home as well as in host or third countries, the
structure of the regulation will be particularly telling of its effectiveness. A poorly
designed policy may see companies complying with the bare minimum. For example,
companies have been found to extract water from a local source or polluting it remnants
of production and thereafter simply ceasing its actions, but refraining from engaging in
activity to properly replace the potable water source for the community. Finally, and
perhaps one of the most concerning impacts on third countries, is the issue that while
the regulation would intend to change EU firm behaviour both at home and abroad,
companies under less stringent regulations in third countries might seek to leverage their
position for a competitive advantage. However, the extent of this possibility is context-
specific as a stronger regulatory environment may have regional effects and either
pressurize governments in a host or third country to adopt similar legislation or hold
companies in a host or third country accountable to follow suit voluntarily.
Expected human rights impacts
Stakeholders were asked about their perception on the effects that the introduction of
mandatory due diligence requirements through the supply chain would have on human
rights. While the majority of stakeholders (86.4%) expressed that it is likely that the
introduction of mandatory due diligence requirements has an impact on human rights,
although the difference on views with businesses was less notable in this case since
(67.7%) of businesses also expressed that the requirement of mandatory due diligence is
likely to impact human rights. A very small percentage of stakeholders (3.4%) expressed
that the introduction of mandatory regulation would be unlikely to have an effect on
human rights, while a higher percentage of businesses (9.8%) perceived that to be the
case. Finally, (10.2%) of stakeholders answered that they do not know or do not have an
opinion on the matter, while in the case of the businesses this percentage was (22.6%).
1473 Buhmann, K. (2018). Neglecting the proactive aspect of human rights due diligence? A critical appraisal of the EU’s non-financial
reporting directive as a Pillar One avenue for promoting Pillar Two Action. Business and Human Rights Journal, 3(1), pp. 23-45. Available
at: https://doi.org/10.1017/bhj.2017.24 1474 Clark, G. L., Feiner, A., Viehs, M. (2015). From the stockholder to the stakeholder. How sustainability can drive financial
outperformance. University of Oxford & Arabesque Partners. Available at:
https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf
527
Figure 8.17: Expected human rights impacts under Option 4
Q29 Business Survey; 110 responses – Q24 Stakeholder Survey; 149 responses.
Specific impacts on human rights areas
The large majority of respondents – stakeholders and companies – who were of the view
that mandatory due diligence requirements would have human rights impacts,
considered that these impacts would be positive. Over 60% of respondents expect
positive impacts on all human rights areas, and the top areas – with above 80% of
responses- are the right to freedom from slavery, the rights of the child, women’s rights,
the right to non-discrimination/equality, the rights of indigenous persons, and the right
to life, liberty and security of person. Similar to the previous alternatives, but with a
smaller proportion, expectations of neutral impacts concentrate on the right to own
property (27%), to privacy (25%), and to freedom from arbitrary arrest (22%). Very few
(0% to 2%) of respondents expect a negative rather than positive or neutral impact.
Additionally, most companies who declared that the new regulation was likely to have
some impact, considered that new regulation requiring mandatory due diligence could
have positive impacts on their supply chains. Over 60% of respondents expect positive
impacts on 9 out of the 15 human rights areas, and the top areas – with above 70% of
responses- are the right to freedom from slavery, the rights of the child, and women’s
rights. Companies’ expectations of neutral impacts are similar to stakeholder
respondents. Neutral impacts concentrate on the right to privacy, the right to freedom
from arbitrary arrest (47% respectively), and the right to own property (41%). Very few
(0% to 3%) of respondents expect a negative rather than positive or neutral impact.
86.4%
3.4% 10.2%
67.7%
9.8%
22.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on human
rights
No, it is unlikely tohave impacts on
human rights
Do not know / Noopinion
Stakeholders
Businesses
528
Table 8.57: Specific impacts on human rights areas (Option 4)
Stakeholders Businesses
Negative Neutral Positive No opinion /
don't know Negative Neutral Positive
No opinion /
don't know
Right to Life, Liberty
and Security of Person 0.78% 8.59% 79.69% 10.94% 1.35% 16.22% 66.22% 16.22%
Right to Physical /
Mental Health 1.58% 10.24% 77.96% 10.24% 1.37% 17.81% 64.39% 16.44%
Right to not be subject
to Torture 0.00% 13.49% 78.58% 7.94% 1.37% 16.44% 65.76% 16.44%
Right to Freedom of
Opinion/Expression 0.00% 17.32% 74.81% 7.87% 0.00% 27.40% 57.54% 15.07%
Right to Non-
Discrimination /
Equality
1.58% 6.35% 84.13% 7.94% 0.00% 20.55% 68.50% 10.96%
Right to own Property 0.79% 26.98% 59.53% 12.70% 1.37% 41.10% 36.99% 20.55%
Right to freedom from
Slavery 1.58% 3.15% 88.19% 7.09% 1.37% 12.33% 76.72% 9.59%
Right to Freedom from 0.79% 22.05% 66.14% 11.02% 0.00% 31.51% 46.58% 21.92%
529
Arbitrary Arrest
Right to Privacy 0.79% 25.40% 61.91% 11.90% 0.00% 31.51% 46.58% 21.92%
Right to Peaceful
Assembly / Association 0.79% 11.81% 77.95% 9.45% 0.00% 23.29% 64.39% 12.33%
Right to Education 0.81% 16.94% 70.97% 11.29% 2.78% 23.61% 54.17% 19.44%
Rights of the Child 0.79% 3.97% 87.30% 7.94% 2.82% 12.68% 71.84% 12.68%
Women's Rights 0.00% 5.65% 87.09% 7.26% 2.74% 15.07% 71.24% 10.96%
Rights of Indigenous
Persons 0.00% 9.52% 83.33% 7.14% 1.35% 21.62% 59.46% 17.57%
Rights of People with
Disabilities 0.00% 16.00% 73.60% 10.40% 1.33% 20.00% 57.33% 21.33%
Q43 Stakeholder Survey; 131 responses. Q50 Business Survey; 77 responses.
530
Other sub-options
This section provides an indirect assessment of the sub-options that consider different
applications of mandatory due diligence according to company size and economic sector.
Due to low response rate the results below are presented as absolute frequencies;
results by specific human rights area are not included for the same reason. The sub-
options are:
a. Sub-option 4.1: Narrow category of business (limited by sector)
b. Sub-option 4.2(a): Set of large companies
c. Sub-option 4.2(c): All business plus specific obligations only applying to large companies.
531
Figure 8.18: Expected human right impacts by economic sector under Option 4
Q49 Business Survey; 110 responses.
While the results above should be observed in recognition of their low response rates
and implicative limitations, the few observations available do present an interesting
story. There is a tendency to have positive prospects regarding the potential effects of
mandatory due diligence among companies from the manufacturing sector, as well as
among the retailing, agriculture and agribusiness, automotive and consumer goods
8
8
4
4
12
1
7
3
4
3
6
2
16
2
12
1
3
2
1
1
2
2
1
1
1
4
1
2
2
3
5
2
1
4
4
1
2
1
0 2 4 6 8 10 12 14 16 18
Agriculture and agribusiness
Automotive
Chemicals
Construction and real estate
Consumer goods
Education
Energy production and utilities
Mining and quarrying
Financial services
Government/Public sector
Healthcare, pharmaceuticals and biotechnology
IT and Technology
Logistics and distribution
Manufacturing
Professional services
Retailing
Telecoms
Transportation, travel and tourism
Conglomerate/more than one
Yes, it is likely to have impacts on human rights No, it is unlikely to have impacts on human rights
Do not know / No opinion
532
sectors. The rest of the sectors follow a similar pattern, displaying consensus regarding
the perception that Option 4 is likely to have impacts in human rights. The graph below
shows a similar situation, amongst SMEs, most companies have favourable prospects
regarding Option 4. Amongst large enterprises, the great majority shares these
prospects.
Figure 8.19: Expected human rights impacts by company size under Option 4
Q49 Business Survey; 110 responses.
Environmental Impacts
This section presents the perceptions of companies and stakeholders regarding general
and specific environmental impacts of the implementation of new regulation requiring
mandatory due diligence as a legal duty of care. The questionnaire assessed this option
in terms of a general application of mandatory due diligence without specifying any
enforcement mechanisms or differential conditions according to company size or
economic sector concerning environmental impacts.
Consequently, the following results review the application of the new regulation
horizontally across sectors including all business regardless of company size. This
alternative corresponds to sub-option 4.2(b). Additionally, to address the sub-options
that consist of changing the scope of the requirements according to the economic sector
and company size, the different environmental impacts are analysed according to these
criteria. The expected environmental impacts of sub-options consisting of different
enforcement mechanisms are not covered due to the data limitations mentioned above.
The new regulation requiring mandatory due diligence, which requires companies to
carry out due diligence to identify, prevent, mitigate and account for actual or potential
impacts is the most favoured option in terms of its potential effects on the environment.
Most stakeholders and companies declare that they expect this alternative to have
environmental impacts, but there are substantial differences between both types of
stakeholders. A fifth of the participant companies do not expect environmental impacts,
and a quarter does not declare an opinion, indicating, once more, uncertainty regarding
the potential effects of this alternative.
10
59
3
20
3 7
SME (<250 employees) Large enterprise (>250 employees)
Yes, it is likely to have impacts on human rights
Do not know / No opinion
No, it is unlikely to have impacts on human rights
533
Compared to the previous options – voluntary guidelines and required due diligence
reporting – the expectations of positive environmental impacts are cleat cut among
respondents. Among those who expect impacts associated to the new regulation, the
vast majority in both groups indicate that Option 4 is likely to have positive effects on all
the considered areas, particularly on the environmental air pollution and waste. Although
there is a high level of coincidence between stakeholders’ and companies’ perceptions,
some areas such as agricultural fertilisers and forests, show that the expectations of
positive impacts are much higher among stakeholders. Additionally, companies refrain
from giving an opinion in a higher proportion. These results are similar to the previous
options, in which differences could be related to the specific sector where companies
operate and the individual survey respondent’s knowledge about the different areas
considered to assess environmental impacts.
Because of data limitations, the situation for the sub-options is more difficult to
determine. In general, large companies expect that new regulation requiring mandatory
due diligence will have an impact on the environment, and the prospects are very similar
across sectors, particularly in manufacturing and retailing. Despite showing a favourable
disposition to mandatory due diligence, these results should be interpreted carefully as
this option was presented to respondents without specifying conditions according to size,
sector or enforcement mechanisms.
Aside from expected benefits regarding an increased engagement of companies with the
environment and climate change, the literature has identified potential risks for
compliance with more stringent environmental regulations. According to the literature,
areas with lax environmental regulation, good market access to high-income countries
and corruption opportunities – i.e. pollution havens – strongly attract polluting firms and
significantly explain the location choice of polluting affiliates. This indicates that more
demanding regulation such as Option 4, should consider additional market protection
measures (e.g. a specific tax on imports), to discourage companies from taking
advantage of pollution havens in order to reduce their compliance costs1475.
Given that policy Option 4 applies to firms operating in the EU, companies would have to
completely remove themselves from the European market in order to be exempted from
liability in the case of non-compliance. Nevertheless, the risk of pollution havens lies in
the criteria by which due diligence is deemed satisfactory rather than on relocation.
According to the findings of the EU Assessment of Due Diligence Compliance Cost,
Benefit and Related Effects on Selected Operators in Relation to the Responsible
Sourcing of Selected Minerals (2014)1476, the policy options that seek to establish
mandatory legality certificates for sustainable mineral sourcing risk being ineffective.
Companies may seek the easiest, least risky and burdensome way of complying with
mandatory due diligence by avoiding sourcing from regions under such regulation. This
could trigger negative impacts on the environment, as in this specific example, mineral
flows could be diverted towards companies with lower environmental standards and
norms (for example, upstream sourcing from suppliers that comply with laxer
environmental regulation).
1475 Candau, Fabien, and Elisa Dienesch. 2017. "Pollution Haven and Corruption Paradise". Journal of Environmental Economics and Management 85: 171-192. doi:10.1016/j.jeem.2017.05.005 1476 See European Commission (2014), Impact Assessment Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council setting up a Union system for supply chain due diligence self-certification of
responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas.
PART 1 (Impact Assessment). Available at: https://eur-lex.europa.eu/resource.html?uri=cellar:b05a9c8f-a54d-11e3-8438-
01aa75ed71a1.0001.01/DOC_1&format=PDF
534
As such, the study concludes that a robust mandatory due diligence regulation must
ensure that it restricts companies from avoiding stringent regulations by taking
advantages of sourcing outside of the legislation’s scope. In fact, investigating policy
option 6, which implements an import ban for EU importers of ores that fail to
demonstrate compliance with the OECD Guidance, the study demonstrates that positive
impacts are most effectively delivered via increased government interventions to ensure
that due diligence on environmental impacts is properly exercised. Therefore, the extent
of risks posed by pollution havens – or countries with less stringent regulation regarding
environmental and non-environmental matters – will depend on the definitions of
offences and scope of liability of the chosen policy option.
Beyond domestic intervention, evidence, including results of the EU Impact Assessment
of Directive 2008/99/EC on the protection of the environment through criminal law1477
demonstrates that harmonisation of due diligence requirements across national
boundaries, as well as with existing regulatory tools, can be expected to provide positive
environmental impacts through increased sanction levels, offence definitions, and scope
of liability. For example, the European Commission’s Report on the Implementation of
the Environmental Liability Directive (ELD), which establishes a framework based on
the polluter pays principle to prevent and remedy environmental damage, is weakened
by the fact that it is not coordinated or harmonised with the Habitats Directive. This
allows for ambiguity and a fragmented interpretation of concepts such as significant
biodiversity damage or preventive and remedial measures across Member States. As
such damage or preventive methods cannot be properly measured, determining the
extent of potential impacts, and establishing causal links is very difficult. While a key
added value of the ELD is the possibility to attribute strict liability to an operator for
damage to biodiversity, the distinction between “strict liability” and “fault-based liability”
exists across different types of activities that are harmful for biodiversity. The result of
this is that the procedures to prove causal links in the case of fault-base liability are
exacerbated, and the implementation of the key accountability mechanism of the ELD is
rendered impractical.
However, while recognizing challenges in real environmental impacts, evidence does
demonstrate that mandatory due diligence requirements can be designed in such a way
to have significant benefits, even when under 100% of companies comply. The EU
Timber Regulation is perhaps one of the most notable regulations for its milestone
binding characteristic as well as its successful implementation. The 2016 EUTR
Evaluation indicates that the regulation proved to be highly relevant for tackling illegal
logging and related trade by changing market behaviour patterns and freeing supply
chains from illegally harvested timber. It is recognised as an important instrument to
halt deforestation and forest degradation, enhance and maintain biodiversity, and
address global climate change. Additionally, the report highlights the EUTR’s added value
of establishing uniform rules, and its coherence with other relevant policy instruments
(VPAs, FLEGT AP, and the EU Wildlife Trade Regulations).
In sum, similarly to the conclusions addressed in the human rights impacts section for
this policy option, the extent of the identified benefits will differ according to the
timeframe, conditional on the definitions of offences, scope and enforcement
1477 See COMMISSION STAFF WORKING DOCUMENT Accompanying document to the Proposal for a DIRECTIVE OF THE
EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of the environment through criminal law. IMPACT
ASSESSMENT. Available at: https://ec.europa.eu/smart-
regulation/impact/ia_carried_out/docs/ia_2007/sec_2007_0160_en.pdf [Accessed 11 Sep. 2019].
535
mechanisms of Option 4. Outcomes such as termination of contracts or change of
supplier and partners up and downstream the supply chain correspond to more
immediate results likely to happen in the short to mid-term (provided that those
suppliers/partners do not change their own practices). Other impacts such as the
development of sustainable business models and the establishing of organisational
learning strategies to implement a comprehensive due diligence strategy across units are
outcomes likely to evolve in the mid to long term, together with the competitive
advantages and shareholder value maximisation linked to these processes1478,1479. These
potential long-term positive outcomes are particularly important given the risk posed by
companies that source from countries with less strict regulation (as shown by
interviewees concerns regarding offshoring harmful practices), because they may serve
to counterbalance these risks, or even help overcome them if the future regulation
prioritises a focus on prevention, provides legal certainty, and is consistent with existing
requirements.
As demonstrated by survey responses as well as extensively in the literature, while EU
companies are already concerned of the ETS’s effects on carbon leakage, differences in
further carbon regulation between regions fuel concerns about competitiveness.
Mechanisms to tackle competition issues may improve environmental effectiveness and
public support of such measures not just within the EU, but by setting a good example,
around the world. However, possible solutions will require context and sector-specific
considerations as drawbacks and trade-offs will be inevitable.
While numerous solutions have been proposed, three overarching options are commonly
proposed: 1) offsetting net carbon costs of domestic production; 2) border-alignment
mechanisms; and 3) establishing global regulations to equalize costs. While analysing
the various policies to mitigate competition issues is out of scope for the analysis on
environmental impacts, it can be noted that each comes with its own set of challenges,
particularly the latter as history is spotted with difficulties in reaching global agreements.
However, the second solution consisting of border-alignment mechanisms, is of specific
interest to mitigate possible competitiveness impacts deriving from mandatory due
diligence regulation. While typically suggested to offset competition issues under the EU
ETS, compensating carbon intensive industries for the costs of switching from high
emission suppliers to low emission options to comply with mandatory regulation has
been suggested to be effective in levelling borders (CarbonTrust, 2010).
Environmental impacts in third countries
Similary to the effects on rights holders, environmental effects of mandatory due
diligence in third countries are dependent on the kind of business a company
undertakes, the accountability and visibility of its actions in the home country, and the
existing relationships with the surrounding community in the third country. Mandatory
due diligence requirements would hold EU companies accountable to identify and rectify
environmentally damaging activities related to their global activities and possibly
administered by suppliers in third countries.
1478 Clark, G. L., Feiner, A., Viehs, M. (2015). From the stockholder to the stakeholder. How sustainability can drive financial
outperformance. University of Oxford & Arabesque Partners. Available at:
https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf 1479 See also Mohammed, M. (2013). Corporate accountability in the context of sustainability - a conceptual framework.
EuroMed Journal of Business, 8(3), 243-254.
536
However, the structure of the regulation will determine its effectiveness as companies
may seek to comply with the bare minimum under a poorly designed policy. Given that
policy Option 4 applies to firms registered and operating in the EU, the issue of pollution
havens is not directly related to the impacts of EU companies on third countries, and it is
unlikely that companies would completely remove themselves from the European market
in order to move activities to such locations. However, risks lie in a reduction of EU
company presence in pollution havens translating into an increase of companies with
laxer regulations. On the other hand, mandatory due diligence requirements from EU
companies could also have the opposite impact and facilitate the implementation of
stricter enviornmental regulations in host countries and thus support creating a level-
playing in the host or third country of the supply chain company. Even if stricter
legislation is not passed in third countries, stronger environmental due diligence
amongst EU companies may have spill over effects as EU companies will ideally be
sourcing from suppliers that meet their environmental obligations and thus companies in
host or third companies may voluntarily increase compliance with environmental
regulation out of their jurisdiction due simply to competitiveness.
Expected environmental impacts
A substantial percentage of stakeholders (82%) answered that the introduction of
mandatory due diligence requirements in the regulation is likely to have impacts on the
environment, a smaller percentage (53%) of companies declared to agree with that
statement. On the other hand, only 5% of stakeholders perceived that inserting new
regulations with mandatory due diligence would unlikely have an impact on the
environment, while 21% of businesses expressed this point of view. Finally, those who
did not know or who did not have an opinion on whether mandatory regulations would
have an impact on the environment amounted to (14%) in the case of stakeholders,
rising to (27%) for companies. The percentage of answers per category differed
markedly between stakeholders and business responders.
Figure 8.20: Expected environmental impacts under Option 4
81.6%
4.8%
13.6%
52.9%
20.6% 26.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yes, it is likely to haveimpacts on theenvironment
No, it is unlikely to haveimpacts on theenvironment
Do not know / No opinion
Stakeholders
Businesses
537
Q47 Business Survey; 102 responses – Q40 Stakeholder Survey; 147 responses.
Specific impacts by environmental area
The vast majority of respondents who anticipate environmental impacts from mandatory
due diligence regulation expect these effects to be positive for all the areas related to the
environment. In the case of general stakeholders, over 70% foresee positive impacts in
the different areas, except for transport (64.8%) which shows a slightly higher
proportion of no opinion compared to the other areas. Most companies also expect
positive impacts; however, they are between 55%-65% and tend to indicate that they
have no opinion/do not know more often than stakeholders. As for the previous options,
the most relevant areas in terms of potential positive effects are environmental air
pollution (68.9% of companies and 77% of stakeholders) and waste (71% and 77%
respectively). The areas where there are divergent views between stakeholders and
companies are agricultural and fertilisers (80% versus 56%), fisheries, forests and
greening of the economy (differences between 15% and 24% between stakeholders and
companies). In general, a tiny proportion of participants foresee negative impacts across
the different areas, particularly among stakeholders.
538
Table 8.58: Specific impacts by environmental area (Option 4)
Stakeholders Businesses
Negative Neutral Positive No opinion / don't know Negative Neutral Positive No opinion / don't know
Environmental Air Pollution 0.8% 7.9% 77.0% 14.3% 1.6% 9.8% 68.9% 19.7%
Waste 0.8% 6.5% 76.6% 16.1% 1.6% 6.5% 71.0% 21.0%
Energy use and mix 0.8% 9.0% 71.3% 18.9% 1.6% 12.9% 64.5% 21.0%
Transport 0.0% 14.8% 64.8% 20.5% 1.6% 14.8% 60.7% 23.0%
Water Resources 0.0% 8.1% 78.9% 13.0% 1.6% 13.1% 67.2% 18.0%
Biodiversity 0.0% 9.5% 73.8% 16.7% 1.6% 14.8% 55.7% 27.9%
Agricultural Fertilisers 0.0% 8.0% 80.0% 12.0% 1.6% 14.8% 55.7% 27.9%
Forests 0.0% 11.2% 76.0% 12.8% 1.6% 11.5% 59.0% 27.9%
Fisheries 0.0% 12.8% 71.2% 16.0% 0.0% 16.4% 47.5% 36.1%
Greening of the Economy 1.6% 8.1% 73.2% 17.1% 1.6% 14.1% 57.8% 26.6%
Q41 Stakeholder Survey; 128 responses. Q48 Business Survey; 65 responses.
539
Other sub-options
This section provides an indirect assessment of the sub-options that consider different
applications of mandatory due diligence according to company size and economic sector.
Due to low response rate the results below are presented as absolute frequencies;
results by specific environmental area are not included for the same reason. The sub-
options are:
a. Sub-option 4.1: Narrow category of business (limited by sector)
b. Sub-option 4.2(a): Set of large companies
c. Sub-option 4.2(c): All business plus specific obligations only applying to large
companies.
Figure 8.21: Expected environmental impacts by economic sector under Option
4
Q47 Business Survey; 102 responses.
Considering economic sectors with larger response rates, there is a tendency to have
positive prospects regarding the potential effects of mandatory due diligence among
companies from the manufacturing sector, as well as among the retailing, agriculture
and agribusiness, automotive and consumer goods sectors. In the rest of the sectors,
responses indicating that impacts are unlikely are almost as frequent as those indicating
that they do expect impacts from mandatory due diligence.
0 2 4 6 8 10 12 14 16 18 20
Agriculture and agribusiness
Automotive
Chemicals
Construction and real estate
Consumer goods
Education
Energy production and utilities
Mining and quarrying
Financial services
Government/Public sector
Healthcare, pharmaceuticals and biotechnology
IT and Technology
Logistics and distribution
Manufacturing
Professional services
Retailing
Telecoms
Transportation, travel and tourism
Conglomerate/more than one of the above
Yes, it is likely to have impacts on the evironment
No, it is unlikely to have impacts on the environment
Do not know / No opinion
540
Figure 8.22: Expected environmental impacts by company size under Option 4
Q47 Business Survey; 102 responses.
Within the group of small and medium-size companies, responses indicating that the
new regulation is likely to have an impact on the environment are more frequent.
However, responses declaring the opposite or uncertainty have the same frequency. The
situation amongst large companies is clearer, more than half of respondents declare that
it is likely that mandatory due diligence will have an impact on the environment.
Responses such as do not know / no opinion are more frequent than those who indicate
that no impact is expected.
It must be noted that the sub-options that were assessed in the survey did not inform
the respondents about specific obligations or scopes of application regarding size or
sector. However, these results can be interpreted in light of the current context.
In particular response to the Paris agreement in 2015, companies have begun adopting
ambitious emissions reduction targets to ensure the transformational action undertaken
in response to environmental regulation is aligned with current climate science. In order
to be considered “science-based”, company targets must align with what scientists urge
is necessary to comply with the Paris Agreement. Thus far, 732 companies have
committed to undertaking science-based climate action.1480
There is a recent and substantial increase of litigation intended to hold actors
accountable for failures to tackle foreseeable impacts on the environment and climate
change. On the one hand, the upsurge of climate-related court cases reveal essential
discrepancies between the companies’ internal knowledge of their contribution to harmful
activities or emissions and the external communications of these issues. The high
uncertainty displayed by companies regarding their perception of the potential effects of
mandatory due diligence could be reflecting this gap of knowledge and pointing out the
need of increasing the engagement of companies with environmental and climate-related
issues regardless of the economic sector.
1480 See https://sciencebasedtargets.org/companies-taking-action/.
7
47
3
16
4
23
SME (<250 employees)
Large enterprise (>250 employees)
Yes, it is likely to have impacts on the evironment
No, it is unlikely to have impacts on the environment
Do not know / No opinion
541
On the other hand, there are hardly any successful court cases related to climate justice
that have been resolved against companies. In line with these developments, the Report
of the Special Rapporteur on extreme poverty and human rights, 'Climate change and
poverty'1481 denounces the governmental complicity with corporate damages and their
failure to promote compliance with the different existing regulations. It emphasises the
need for mechanisms that hold companies accountable for their negative impacts as well
as implementing transformative approaches to mitigation of environmental impact and
climate change.
As indicated in the climate change section included in the Regulatory Review, our survey
and the interviews showed that climate change due diligence is rarely a self-standing
process within companies. Interviewees’ views also show the existence of a silos
mentality when they explain that the alignment of climate change goals or strategies are
not shared company-wise but allocated in specific departments or units. These results
are in line with a recent literature review on reporting and use of non-financial data in
the EU which shows, for example, that out of 80 top-listed companies, only 20% include
a specific climate change policy section, and 30% report greenhouse gas emissions
targets.1482
In this context, the potential benefits of Option 4 regarding climate change are linked to
those effects that relate to the improvement in the specific environmental areas detailed
in the survey results (such as air pollution, waste, energy use, among others). From the
interviewees’ point of view, an enhanced business conduct concerning the prevention,
protection and reduction of environmental harm that results in meeting climate change
goals such as those stipulated in the Paris Agreement, require a regulation that prompts
comprehensive due diligence processes (e.g. due diligence of corporate projects
including the environmental practices of the companies’ affiliates, and internal
awareness processes to maintain continuous assessment of existing and potential
actions to assist in limiting global warming).
It must be noted that steps to implement due diligence that includes climate-related
issues are relatively new. The most salient ones so far correspond to the OECD Guidance
on Responsible Business Conduct, and the EU NFRD. These are characterised by
complementing environmental and human rights domains acknowledging their
interrelationship. Both domains intersect in the following main dimensions: the
environment as a prerequisite for the enjoyment of human rights; specific human rights
that are essential for good environmental decision-making; and the right to a safe,
healthy and ecologically-balanced environment as a human right itself.1483 Taking these
into account, environmental due diligence – always conditional on its definitions, scopes
and enforcement – has potential impacts on making progress towards climate-related
targets as long as it is coherent with the recent guidelines and directives that frame the
environment and human rights issues as complementary, prompting organisations to
address them as part of systemic due diligence processes.
1481 Office of the United Nations High Commissioner for Human Rights. 2019. "Report of the Special Rapporteur on Extreme
Poverty and Human Rights. Climate Change and Poverty." Retrieved from: https://www.ohchr.org/EN/HRBodies/HRC/RegularSessions/Session41/Documents/A_HRC_41_39.docx 1482 Juergens, I., Erdmann, K. (2019). A short qualitative exploration of the reporting and use of non-financial data in the
context of the fitness check of the EU framework for public reporting by companies. Report prepared for the European
Commission by DIW Berlin (In press). 1483 UNEP. (2019). Human Rights and the Environment. [online] Available at: http://web.unep.org/divisions/delc/human-
rights-and-environment [Accessed 29 Oct. 2019].
542
Impacts on Public Authorities
This option would most likely entail the same activities for public authorities as option 3,
i.e. an external study to draft an implementation guidance and an ex post study on the
implementation. However, if any monitoring is to take place at EU level, the expected
personnel cost for staff at the EC to monitor and assess the implementation would most
likely be much higher, as the monitoring activities would go beyond assessing sample
reports. Monitoring activities would require EC or staff or external auditors to look into
selected companies’ supply chains.
In order to be “mandatory”, sub-options 4.1 and 4.2 would need to be accompanied by
legal sanctions or liability for failure to comply. Therefore, option 4 implies higher costs
than earlier options for the state-based oversight and judicial systems in EU Member
States, depending on the sub-option and the chosen oversight and enforcement
mechanism.
Sub-option 4.1: Narrow category of businesses (limited by sector)
Due to the lack of existing legislation, it is difficult to estimate costs for public
authorities, particularly against the background that it is unclear to which and how many
industry sectors a new regulation would apply. If the latter would apply to large
industries or various sectors, more companies would have to comply with the regulation.
The greater the scope of companies or sectors, to the more compliance controls and
inspections of companies are required to ensure high compliance rates. This could
increase the costs for public authorities. As the coverage of industry sectors of the
regulation remains yet unknown, possible costs described below need to be read with
reservations.
Implementation, monitoring and enforcement of the regulation is most likely to take
place at Member State level. However, if any monitoring or enforcement were to take
place at EU level, it can be expected that this option would – similar to option 3 – require
personnel costs for staff at the EU to provide implementation guidance and conducts
sample reviews.
To ensure an effective implementation of a mandatory regulation it would also be
necessary to provide personnel at Member State level in designated control bodies to
conduct and coordinate compliance controls and inspections in each Member State.
According to the estimations from the Impact Assessment regarding the Conflict Minerals
Regulation for the assessed mandatory regulatory options, such personnel costs can be
estimated around 1.5-2 FTE per EU Member State. Based on Eurostat data for average
labour costs and average working hours per week, this could result in a yearly average
labour cost of per EU MS of 81 300 EUR (1.5 FTE) to 108 400 EUR (2 FTE) and a total
average labour cost for the EU-28 of approximately 2.276 to 3.034 million EUR (for 1.5
and 2 FTE, respectively).
Table 8.59: Average labour costs (EUR), in 2018 based on EU-281484
Average hourly Average monthly
Average yearly
labour costs for 1.5
Average yearly
labour costs for 2
1484 Average monthly labour cost were calculated based on average hours worked per week of full-time employment for the EU-
28 in 2018 and a 4-week month. Source: https://ec.europa.eu/eurostat/databrowser/view/tps00071/default/table?lang=en.
543
labour costs labour costs FTE FTE
27.4 4515.52 81279.36 108372.48
Source: Eurostat, Indicator: Labour costs annual data - NACE Rev. 21485
It has to be noted, however, that these labour costs differ substantially between
different Member States and that these averages are averages across different types of
professions not public servants which can be expected – especially when employing
highly specialized posts such as in this case – to be causing higher than average labour
costs. Furthermore, it has to be pointed out again that the Conflict Minerals Regulation is
only applicable to specific conflict-related risks in a limited sector, so it can be assumed
that costs would be higher for a regulation with a wider scope.
In addition, it can be expected that additional costs may be created due to coordinative
management committee meetings with representatives from the European Commission
and the Member States, which are estimated at 60,000 EUR if taking place twice a year
and 120,000 EUR if taking place four times a year.1486
Sub-option 4.2: Horizontally across sectors
The initial cost to set up structures and processes to monitor the implementation of a
new mandatory regulation would be similar regardless of the number of companies
affected by a new regulation. However, the expected operating costs for sub-options
4.2(a) to 4.2(c) might differ slightly according to the number of companies which may
be covered by the regulation. As discussed under sub-option 4.1, the more companies
would be liable to the regulation, the more costs it may create for public authorities as
they may need to conduct more compliance controls and inspections of companies.
Sub-option 4.2(a): Set of large companies
The cost of this sub-option depends on the number of companies to which the new
regulation would apply. Given that 99% of EU companies are SMEs (enterprises
employing less than 250 people)1487, it can be expected that this sub-option would only
apply to 1% of EU companies. However, this would depend on the definition of large
companies and/or the definition of the affected group of companies. It is also noted that
a significant number of these SMES are within the supply chains or value chains of the
1% of large companies. Insofar as the regulation would extend to due diligence through
the supply chain, the standard of care required would indirectly apply to the practices of
these SMEs through the large companies with which they do business.
1485 Average hourly labour costs are defined as total labour costs divided by the corresponding number of hours worked by the yearly average number of employees, expressed in full-time units. Labour Costs (D) cover Wages and Salaries (D11) and non-
wage costs (Employers’ social contributions plus taxes less subsidies: D12+D4-D5). Source:
https://ec.europa.eu/eurostat/databrowser/view/tps00173/default/table?lang=en. 1486 See the Conflict Minerals Regulation Impact Assessment. 1487 Eurostat (2018). Statistics on small and medium-sized enterprises. Available at: https://ec.europa.eu/eurostat/statistics-
explained/index.php/Statistics_on_small_and_medium-sized_enterprises.
544
Sub-option 4.2(b): All business, including SMEs
The cost of this option may be slightly higher than the cost expected for option 4.1 since
under this option the regulation would apply to all companies in the EU, independent of
their size or sector. As indicated before, it can be expected that initial costs for setting
up structures and processes would remain the same, but monitoring and coordination
activities may increase if more compliance controls and inspections would be carried out
as a result of the larger number of companies covered by the new regulation. This may
require more personnel at the European Commission for the monitoring of the
implementation and sample reviews, as well as more personnel to coordinate compliance
controls and inspections in each Member State.
Sub-option 4.2(c): All business plus specific additional obligations only applying
to large companies
The cost of monitoring additional obligations for large companies would depend on the
type of additional obligations and whether this would require additional staff and/or
additional processes and structures. For example, in this study we describe the example
of requiring large companies to undertake additional due diligence steps relating to
climate change with reference to the Paris Agreement.
Since the Paris Agreement is a state-to-state agreement, any new regulatory due
diligence standard which requires additional measures from (large) companies in relation
to the Paris Agreement would need to clarify what such expected steps would be. For
example, if recent developments discussed in the Regulatory Review, including the OECD
NCP case against ING, are used as an indication of how this due diligence requirement
may develop, additional requirements for large companies may refer to target-setting,
measuring and reporting on climate change impacts. In accordance with this mixed sub-
option these expectations would be automatically imposed on certain large companies by
virtue of their size and regardless of their climate change risks, and would not be
applicable to smaller companies unless they have specific climate change risks.
Depending on the level of oversight which is already provided at Member State level for
the monitoring of companies’ climate change impacts, additional obligations relating to
specific target-setting, measuring steps and reporting on companies’ approaches, as well
as their strategies and challenges for low-carbon developments, it is expected that
additional obligations relating to specific target-setting, measuring and reporting on
climate change impacts may create additional measuring and oversight resources at
Member State level.
Sub-option 4.3: Sub-options 1 and 2 accompanied by a statutory oversight and
/ or enforcement mechanism
In order to be “mandatory”, sub-options 4.1 and 4.2 would need to be accompanied by
legal sanctions or liability for failure to comply. The potential cost implications of these
enforcement options are discussed in sub-options 4.3(a) or 4.3(b) below.
It is also noted that these enforcement or liability mechanisms set out in sub-options
4.3(a) and 4.3(b) are not mutually exclusive, and Member States may make provision
for both in their implementation of the EU standard. Accordingly, it can be expected that
Option 4 could create significant additional costs for public authorities and the legal
systems in EU Member States.
545
Given the lack of empirical evidence from similar legislative initiatives, which are all
relatively recent, the cost for potential elements of sub-option 3 is not possible to
foresee, especially since the specific elements of a new regulation are not defined.
Even for relatively old laws such as the Environmental Liability Directive (ELD) from
2004 it is difficult to find estimates concerning the cost for public authorities. A report on
its implementation1488 states that only three Member States (Belgium, Bulgaria, Spain)
provided precise data on administrative costs1489 for public authorities, ranging from EUR
55 000 per year (in the Flemish Region of Belgium) to annual administrative costs of
EUR 135,613 per year in Bulgaria and EUR 2 million (in some of the autonomous
communities of Spain). As result of the limited information on administrative costs for
authorities, the report concludes that it is not possible to draw sound conclusions on the
administrative costs.
Sub-option 4.3(a): Mechanisms for judicial or non-judicial remedies
The additional cost of sub-option 4.3(a) would depend on whether judicial or non-judicial
remedies under a new regulation would use existing judicial or non-judicial structures or
whether it would require to establish new bodies and/or processes. If a judicial remedy is
foreseen, it is expected that this would take place within existing judicial structures and
processes so that this option would not create any additional costs for the legal systems
of EU Member States. If non-judicial remedies are foreseen under a new regulation, the
question of additional costs depends on the form of such non-judicial remedies and
whether these would use pre-existing structures. Non-judicial remedies could take the
form of specially created tribunals, which may create additional costs depending on their
nature (private or public), but could also consist of having resort to existing
administrative bodies or ombudsmen.
Sub-option 4.3(b): State-based oversight body and sanction for non-compliance
As described in the Problem Analysis and Regulatory Options, an oversight and
enforcement body could either be established within existing departments and or a new
body could be created. If a new body would need to be created, additional costs for
public authorities would be significantly higher compared to financing additional staff
within existing institutions such as a state department dealing with company law.
However, even if existing structures are mandated with enforcement functions, this
would most likely imply additional costs for training and expert staff who are familiar
with human rights, environmental, climate change and related sustainability impacts in
the supply chain.
Furthermore, it would depend on which law would be used for the enforcement (e.g.
company or criminal law) whether such oversight bodies would need to be instituted at
the national Member State level or whether it could be established at the EU level. If an
1488 Brussels, 14.4.2016 COM(2016) 204 final REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN
PARLIAMENT Report from the Commission to the Council and the European Parliament under Article 18(2) of Directive
2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. Retrieved from:
https://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-204-EN-F1-1.PDF. And COMMISSION STAFF WORKING
DOCUMENT REFIT Evaluation of the Environmental Liability Directive Accompanying the document Report from the Commission
to the European Parliament and to the Council pursuant to Article 18(2) of Directive 2004/35/EC on environmental liability with regard to the prevention and remedying of environmental damage. SWD/2016/0121 final. Retrieved from: https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=SWD:2016:121:FIN 1489 According to the report “administrative costs under the ELD are only those which are not borne by the liable operators, i.e.
cannot be recovered from them. They relate for example to the manpower, equipment and other administrative costs which
are – apart from the initial set-up costs at the beginning of the implementation – those continuous costs which cannot be
recovered from liable operators (system maintenance and compliance promotion as outlined above).”
546
oversight and enforcement body would need to be established in each EU Member State,
this would imply significant additional costs for public authorities in the Member States.
The cost for such an oversight and enforcement body, independent of whether it would
be established at Member State or EU-level, would also depend on its foreseen tasks,
powers and the resulting requirements for the quantity and qualifications of specialized
staff. Oversight and enforcement bodies could, for example, have extensive powers to
grant orders and issue fines, or have investigatory powers such as issuing warrants,
undertaking searches or issuing subpoenas. The more comprehensive such powers would
be, the more extensive the tasks of such oversight bodies would be and the more staff
with specialized qualifications would be needed.
Depending on which system of sanctions will be chosen for a new regulation on due
diligence different costs may arise for public authorities. The EFFACE synthesis report
discusses different systems of sanctions (administrative/criminal/civil) for the ECD. It
provides an overview of the different types of approaches and sanctions to addressing
environmental crime and briefly compares their cost impact for the state. The report
concludes that under a criminal law approach costs for the State would be highest
compared to an administrative approach or civil law suits (see Table 8.60 below).
Table 8.60: Expected costs for public authorities from criminal, administrative
and civil law approaches to addressing environmental crime in EFFACE
synthesis report
Criminal law approach Administrative approach1490 Civil law suits
Costs of proceedings born
mostly by state; relatively high
costs for the state due, among
others, to high threshold of
proof and length/complexity of
proceedings
Typically, lower costs for the
state than in criminal
proceedings, among others
because of less complex
proceedings
Relatively low costs for the
state, but often high costs for
the parties, as they are
responsible for producing
evidence
The Impact Assessment relating to the UK Bribery Act1491 expects as a result of the new
regulation one additional contested fraud and corruption prosecution per year and one
additional contested criminal prosecution every three years. The costs of these additional
court cases are estimated to range up to around 2 million British Pounds per year.
However, if fines were issued to companies, this may also generate income for public
authorities, which depending on the level of the fines, may cancel out or even outweigh
some of the public costs for setting up new bodies and judicial proceedings.
The Impact Assessment relating to the EU Timber Regulation provides an estimate for
the assessed option 5, which is a legislation requiring companies placing timber on the
market to exercise due diligence in ascertaining that the products are legal. For this
option the impact assessment expects regulatory costs from the “verification whether
effective systems have been put in place by operators for ascertaining that the products
are legal” and estimates regulatory costs in the EU of EUR 1 million per year. In how far
1490 “Regarding terminology, it should be noted that what is referred to as administrative sanction or measure in most
countries, may be a called a “civil sanction” or similar in common law systems like in the UK.”
547
these estimates can be compared to the sub-options 4.3 depends on the final design of
the regulation and whether similar activities would be foreseen for any oversight body.
The background analysis1492 for the latest biennial implementation report1493 of the EUTR
provides information on the human and financial resources available to the Competent
Authorities in each country for the implementation and enforcement of the EUTR. The
indicated use of resources is based on the national reports by Member States. However,
the quality and comparability of the reported data by Member States remains relatively
low, which makes it difficult to draw general conclusions from the provided information.
Under the EUTR the Competent Authorities in each country are required to put in place a
plan for checks of operators and procedures for checks on Monitoring Organisations to
verify their compliance with the EUTR. In this regard, it is important to point out that the
applicability of the following figures depends crucially on the tasks which would be
required by public authorities under a new due diligence regulation and in how far these
tasks are similar or comparable to those required by the Competent Authorities under
the EUTR.
For human resources, the background analysis report describes that for timber imported
into the EU, available human resources of Competent Authorities ranged from 0.125 full
time equivalent (FTE) staff to as many as 8 staff.1494 Similarly, for domestic timber,
available human resources varied between 0.125 FTE and 20 staff. For both estimates,
i.e. for imported as well as domestic timber estimates, the relatively high number of
human resources reported by Italy, Greece, Denmark and Bulgaria were taken out as
outliers in the report.1495 In addition, in many countries the core staff are also supported
by others, who are not primarily focussed on EUTR implementation and enforcement
(e.g. forest inspectors). The information on financial resources provided by Member
States in their national reports shows even more variation and less comparability, which
is why no concrete figures can be used as an approximation for potential financial costs
arising for an oversight body. As shown in the detailed tables provided in the literature
review section, some countries have reported extremely limited budgets for
implementation and enforcement of the EUTR (e.g. Belgium), whereas others (e.g.
Germany) reported that they did not have an upper limit.
Similarly, the Impact Assessment on the Seveso III Directive provides a cost estimate
for competent authorities to make an in-depth site-by-site analysis of the concerned
establishments. The described objective of such site-by-site analysis is to assess whether
or not there are appropriate safety distances and to identify what remedial land-use
measures might be needed. The total cost for this site-by-site analysis is estimated at
more than EUR 130 million. Depending on the foreseen activities of an oversight body, if
it would be required to also carry out such site-by-site analyses, this cost could incur for
public authorities. It can be expected that the cost could be much higher for a new due
diligence regulation, depending on the number of firms covered by the new regulation.
1492 European Commission (2018). Background analysis of the 2015-2017 national biennial reports on the implementation of
the European Union’s Timber Regulation (Regulation EU No 995/2010). Retrieved from:
https://ec.europa.eu/environment/forests/pdf/WCMC%20EUTR%20analysis%202017.pdf 1493 European Commission (2018). Evaluation of Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market (the EU Timber
Regulation). Retrieved from: https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1538746572677&uri=COM:2018:668:FIN. 1494 In the official biennial implementation report the upper estimation is 8 staff which seems to be the correct figure,
compared to the indicated 10 staff in the background analysis. 1495 The report states that the “relatively high number of human resources reported by Italy, Greece, Denmark and possibly
others may be based on customs personnel or other supporting staff in general also having been included.”
548
In the Seveso III Directive these requirements only apply for “upper-tier
establishments”, which consisted in 2011 of 4791 establishments.1496
3.2.3 Comparison of options and final assessment
Estimated Cost at Company Level
For mandatory DD, our estimates indicate that a representative large company with
revenues of 10 billion EUR would face additional annual labour cost of approximately
500,920 EUR. By comparison, for mandatory DD, our estimates indicate that a
representative SME with revenues of 1 million EUR would face additional annual labour
cost of approximately 740 EUR, while a large SME with annual revenues of 50 million
EUR (the upper bound according the Eurostat SME definitions) would face additional
annual labour cost of 36,990 EUR. Taking into account the additional burden resulting
from new DD requirement, we consider our results to be in line with the findings of the
impact assessment for the EU’s Non-financial Reporting Directive.
Social Impacts
Options 2 and 3 are expected to have only a minor positive social impact. This is due to
the fact that both options do not require companies to take any due diligence actions but
merely provide new guidance or require reporting similar to the existing EU NFRD. It is
not expected that substantial actions would be taken by companies to address social
matters as a result of these options. Both options are also expected not to have any
major negative or positive impacts on employment levels. Negative impacts on
employment are relatively unlikely since option 2 does not stipulate any requirements
and the potential economic burden of the reporting requirements under option 3 would
remain limited (depending though on the detailed requirements, coverage,
enforceability, etc.).
Since option 4 is the most ambitious option and requires the most efforts from
companies, it is the option from which social impacts are expected to be most
significant. On the one hand, negative impacts on employment levels could arise if the
economic burden for companies arising from the due diligence requirements is
substantial. On the other hand, there could also be positive impacts on employment
levels within and outside of the EU, especially in the long run. This could be the case if
reputational effects lead to increased production and therefore increased demand for
labour or if there is more demand for staff with specialised expertise resulting from due
diligence activities. The magnitude of the social impacts depends on the application of
the new regulation (the more companies affected, the higher the expected negative and
positive impacts), the social issues which are expected to be addressed and specified by
the regulation and thus to be covered by companies, and the effectiveness of an
enforcement mechanism to ensure the implementation of due diligence practices.
1496 According to the Commission Report on the Implementation of the Directive, “in December 2011, a total of 10314
establishments were reported, an increase over the reporting period of 3%, with 5523 lower-tier (54 %) and 4791 (46 %)
upper-tier.” Source: European Commission (2013). FROM THE COMMISSION Report on the Application in the Member States of
Directive 96/82/EC on the control of major-accident hazards involving dangerous substances for the period 2009-2011.
Retrieved from: https://circabc.europa.eu/sd/a/6e9ec4e2-89ae-404e-988c-1ff6effff1d6/1_EN_ACT_part1_v7.pdf.
549
Impacts on Human Rights
While voluntary guidelines (option 2) raise awareness and provide rights-holders with a
benchmark against which to hold companies accountable, they likewise risk being
exploited by companies that advertise to be in line with guidance, but take no steps to
actually implement it in entirety. Voluntary guidelines also inherently lack any kind of
enforcement mechanism and rely on a company’s willingness to comply and respect
human rights duties. The analysis of voluntary guidelines confirmed the notion that
explicit denomination of specific human rights duties in voluntary guidance is likely to
suggest greater positive impact. While voluntary due diligence mechanisms do not create
new law, it is evident that if explicitly named in due diligence documents, corporate
ignorance of human rights duties can have legal consequences, hence making companies
more aware of the need to respect human rights (Lindsay et al. (2013)).
Reporting requirements (option 3) likewise raise awareness among both companies and
stakeholders and provide leverage for rights-holders to demand information. However,
transparency and compliance are challenging to monitor and enforce (especially if
contracting in the informal sector) as companies may perceive reporting and disclosure
activities as procedural rather than substantive.
While very few (0% to 5%) respondents expected a negative impact, rather than a
positive or neutral impact from reporting requirements, the literature suggests that such
requirements might not have any impact on companies that already understand the
value of transparent reporting for their consumer base. Impacts will instead focus most
on those companies that do not willingly report. As such, reporting requirements risks
missing an opportunity for rights-holders to demand their rights if transparency
mechanisms are not enforced.
Finally, the evidence above regarding mandatory due diligence requirements as a legal
duty of care (option 4) suggests that as long as robust risk assessment (based on the
risks to those affected), transparency, monitoring, and compliance systems are enforced,
and if the mechanism is designed to avoid unintended consequences, such as through
wide standardisation to avoid circumvention, rights-holders can expect opportunities for
protection. Regulation requiring mandatory due diligence allows for significant
preventative benefits that reporting requirements fail to capture because of their
retrospective nature. Due diligence requirements are especially likely to create
substantive impact when they include demands for collaboration with external
stakeholders and prioritize robust compliance mechanisms.
As explained in section 3.2.2, the regulatory options considered in this study imply that
the legal obligations of companies gradually increase as we move from the new
voluntary guidelines to mandatory due diligence. Table 8.61 summarizes the perceptions
of stakeholders and companies, indicating whether the proportion is higher, lower, or the
same compared to the previous regulatory option. Notably, among those who expect
impacts, both, general stakeholders’ and companies’ perception that due diligence
options would have a positive impact on specific human rights, increased for every
fundamental right when moving from reporting requirements to mandatory due diligence
as a legal duty of care. Interestingly, stakeholder perceptions that due diligence options
would provide positive human rights impacts increased more than 10% for each duty
when moving from option 3 to option 4. Companies likewise all increased expectations
for positive human rights impacts when moving from option 3 to option 4 but increases
550
of more than 10% were specifically evident for the Right to Non-Discrimination/Equality,
and Women’s Rights.
Interestingly, the amount of stakeholders that foresaw due diligence options to have
positive human rights impacts decreased for five specific human rights when moving
from voluntary guidelines to reporting requirements—these included the Right to Life,
Liberty, and Security of Person; the Right to Physical and Mental Health; the Right to not
be subject to Torture; Rights of the Child; and the Rights of Peoples with Disabilities.
Companies felt that even more specific human rights, 10 to be specific, would not benefit
by moving from voluntary guidelines to reporting requirements—these included the Right
to Life, Liberty, and Security of Person; the Right to Physical and Mental Health; the
Right to Freedom of Expression; the Right to Non-Discrimination/Equality; the Right to
own Property; Right to Privacy; Right to Peaceful Assembly; Women’s Rights; Rights of
Indigenous Persons; and Rights of People with Disabilities. Results seem to suggest that
both stakeholders and companies foresee mandatory due diligence as a legal duty of
care to be more likely to have positive human rights impacts than any other mechanism.
However, when comparing voluntary guidelines to reporting requirements, it seems all
respondents foresee voluntary guidelines to be more effective of the two (options 2 and
3). The conclusion would thus be for regulation to either remain at voluntary guidelines
level, or to fully implement mandatory due diligence, as reporting requirements seem to
be perceived as ineffective in comparison.
The regulatory options considered in this study imply that the legal obligations of
companies gradually increase as we move from the new voluntary guidelines to
mandatory due diligence. The following table summarizes the perceptions of
stakeholders and companies, indicating whether the proportion is higher, lower, or the
same compared to the previous regulatory option. Two arrows indicate differences of
more than 10%.
551
Table 8.61: Summary of respondents’ perceptions about human rights impacts by area
Stakeholders Businesses
552
Negative Neutral Positive No opinion/Do not
know Negative Neutral Positive
No opinion/Do not
know
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
O2 to
O3
O3 to
O4
Right to Life, Liberty and Security
of Person ↓ ↑ ↑ ↓↓ ↓↓ ↑↑ ↑ ↓ ↓ ↓ ↑ ↓ ↓ ↑ ↑ ↓
Right to Physical / Mental Health ↓ ↑ ↑ ↓↓ ↓ ↑↑ ↑ ↓ ↓ ↓ ↑ ↓ ↓ ↑ ↑ ↑
Right to not be subject to Torture ↓ ↑ ↑ ↓↓ ↓↓ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↑ ↑
Right to Freedom of
Opinion/Expression ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↑ ↓ ↓ ↓ ↓ ↑ ↑ ↑
Right to Non-Discrimination /
Equality ↓ ↑ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↑ ↓ ↑ ↓ ↓↓ ↑↑ ↑ ↑
Right to own Property ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓↓ ↑ ↓ ↓ ↓ ↓ ↑ ↑ ↑
Right to freedom from Slavery ↓ ↑ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↑ ↓
Right to Freedom from Arbitrary
Arrest ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓↓ ↓ ↓ ↓ ↓ ↑ ↑ ↑ ↑
Right to Privacy ↓ ↑ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↓ ↑↑ ↓↓ ↓↓ ↑ ↑ ↑
Right to Peaceful Assembly /
Association ↓ ↑ ↓ ↓↓ ↑↑ ↑↑ ↓ ↓ ↓ ↓ ↑ ↓↓ ↓ ↑ ↑ ↑
Right to Education ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↑ ↓ ↓ ↑ ↑ ↑ ↑
Rights of the Child ↓ ↑ ↓ ↓↓ ↓ ↑↑ ↑ ↓ ↓ ↑ ↓ ↓ ↑ ↑ ↑ ↑
Women's Rights ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↑ ↑ ↓↓ ↓ ↑↑ ↑ ↓
Rights of Indigenous Persons ↓ ↓ ↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↓
Rights of People with Disabilities ↓ ↑ ↑ ↓↓ ↓ ↑↑ ↑ ↓ ↓ ↓ ↑ ↓ ↓ ↑ ↑ ↑
553
Environmental Impacts
shows that the more substantial differences in expected positive environmental effects are among stakeholders when moving from the new regulation
requiring due diligence reporting (Option 3) to the new regulation requiring mandatory due diligence (Option 4). Also, neutral impacts and no opinion
responses tend to decrease within this group, favouring the positive impacts category for all the areas. In the case of companies, the tendency is
similar to stakeholders, but the change from one regulation option to the other does not bring forward differences of more than 10%. This means that
companies’ perceptions are more spread across categories, and as indicated in the detailed results, they often prefer the ‘no opinion/do not know’
answer. Overall, the table clearly shows that for both stakeholders and companies, the expectations of positive impacts across all areas increases when
moving from Option 3 to Option 4.
Stakeholders Businesses
Negative Neutral Positive No opinion/Do not know
Negative Neutral Positive No opinion/Do not know
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
O2 to O3
O3 to O4
Environmental Air
Pollution = ↑ ↑ ↓↓ ↓ ↑↑ ↑ ↓ ↓ ↓ ↑ ↓↓ ↑ ↑ ↑ ↑
Waste = ↑ ↑ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓↓ ↑ ↑ ↓ ↑
Energy use and mix
= ↑ ↓↓ ↓↓ ↑ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↓ ↑
Transport = = ↑ ↓↓ ↓↓ ↑↑ ↑↑ ↓ ↑ ↓ ↓ ↓↓ ↑ ↑ ↓ ↑
Water Resources = = ↑ ↓↓ ↓↓ ↑↑ ↑ ↓↓ ↑ ↓ ↓ ↓ ↑ ↑ ↑ ↑
Biodiversity ↓ ↓ ↓ ↓↓ ↓ ↑↑ ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↓ ↓
Agricultural Fertilisers
↓ ↓ ↓ ↓↓ ↓ ↑↑ ↑ ↓↓ ↑ ↓ ↑ ↓ ↓ ↑ ↓ ↓
Forests ↓ ↓ ↓ ↓↓ ↓ ↑↑ ↑ ↓↓ ↑ ↓ ↓ ↓ ↑ ↑↑ ↑ ↓
554
Table 8.62: Summary of respondents’ perceptions about environmental impacts by area
Fisheries ↑ ↓ ↓ ↓↓ ↓ ↑↑ ↑ ↓↓ ↑ ↓ ↓ ↓ ↑ ↑ ↓ ↑
Greening of the Economy
↓ ↓ ↓ ↓↓ ↓ ↑↑ ↑ ↓↓ ↑ ↓ ↓ ↓ ↑ ↑ ↓ ↑
555
Impacts on Public Authorities
For the options 2 and 3 it is expected that the costs would remain limited as these would
mainly require the drafting of new guidelines, the provision of guidance on their
implementation and possibly sample reviews and the creation and maintenance of a
database for the company reports (for option 3).
The additional costs for the monitoring of the implementation of the regulation under
option 4 are expected to be significant, especially if enforcement is to take place at
Member State or EU level (sub-option 4.3(b)). Legal sanctions or liability for failure to
comply would be necessary if the objective was that sub-options 4.1 and 4.2 would be
mandatory.
The costs for monitoring and coordination under option 4 are expected to increase with
the number of affected companies since this would require more compliance controls and
inspections and as a result more personnel at the European Commission as well as more
personnel in each Member State. In addition, the sub-option of 4.3(b) is expected to
imply significant additional costs for the state-based oversight mechanism in EU Member
States, depending on the chosen oversight and enforcement mechanism. By comparison,
judicial remedies as foreseen in sub-option 4.3(a) are likely to have significantly less
additional costs for Member States, insofar as these costs would fall within existing
budgets for courts and the judicial system.
556
4. Global Comparison of Regulatory Options
This section provides a succinct conclusion for expected impacts under each policy
scenario. A comprehensive and detailed analysis is provided above in section 3, and a
broader overview below in Table 4.1.
Option 1: No policy change
For option 1, most impacts depend on the development of national initiatives. No impact
on employment levels is expected. The impacts for public authorities depend also on the
national developments. Diverging national legal developments may create monitoring
and coordination cost for EU bodies.
Human rights, social, and environmental impacts likewise depend on the development of
national initiatives under policy option 1. However, while expectations regarding direct
human rights impacts cannot be formed under no policy change, given the nature of
depleting environmental resources, it is expected that no policy change might result in
negative environmental impacts.
Option 2: New voluntary guidelines/guidance
Some costs could arise for public authorities from the creation and promotion of new
guidelines, but these are expected to remain relatively small.
Option 2 is expected to have very small or no social impacts. Voluntary guidelines can be
expected to provide some benefits for regarding human rights as well as the
environment by raising awareness, as well as increasing transparency and corporate
accountability. However, positive impacts are risked being ineffective as they lack
enforcement mechanisms and are dependent on company willingness to comply and
transparently share procedural details. Additionally, voluntary guidelines run an
additional risk of being exploited by companies that advertise to be in line with guidance
but take no steps to implement.
Specific to environmental impacts, voluntary guidelines are exceptionally difficult to
compare across national borders as companies may find themselves on unequal
grounding for compliance. Country and capacity context may make it difficult to commit
to compliance as well as monitoring to reduce emissions/potential harms to the
environment. While vigilance plans may be insufficient to address adverse impacts,
operational costs and lack of capacity may act as compliance barriers.
Option 3: New regulation requiring due diligence reporting
Costs for public authorities are expected to be higher as the monitoring of
implementation would require more personnel. Additional costs may arise from the
provision of guidance on implementation, sample reviews of reports and possibly the
creation and maintenance of a database for the company reports. Regarding firm-level
costs for the EU28, if new regulation would be applied horizontally across the EU, “New
reporting requirements” would cause additional aggregate cost of about 3.5 billion EUR
annually.
Option 3 could potentially have small impacts on work conditions and labour rights. No
impact on employment levels is expected. Option 3 can be expected to provide positive
impacts for rights-holders. Even if full transparency is challenging, reporting
557
requirements raise awareness among both companies and stakeholders and provide
leverage for rights-holders to demand information.
In regard to environmental protection, reporting requirements would be estimated to
result in positive impacts as companies will have a mandate to investigate and enhance
their identification of existing and potential adverse environmental impacts. This will
increase visibility and transparency of climate-related due diligence both within the
company as well as externally.
However, in regard to both human rights and environmental impacts, positive impacts
are dependent on proper monitoring and enforcement mechanisms as companies may
perceive reporting and disclosure activities as procedural rather than substantive.
Difficulties in monitoring disclosure activities for the informal sector are particularly
challenging.
Option 4: New regulation requiring mandatory due diligence as a legal duty of
care
Any type of enforcement mechanism under option 4 could potentially imply considerable
costs for public authorities. It is expected that any costs for monitoring the
implementation would increase with the number of affected companies as any
compliance controls and inspections would require more personnel. Especially, sub-
option of 4.3(b) is expected to imply significant additional costs for the state-based
oversight mechanism in EU Member States, which depend on the chosen oversight and
enforcement mechanism.
Firm-level costs specific to new regulation requiring mandatory due diligence as a legal
duty of care limited by sector to a narrow category of business vary. Total additional cost
for EU companies operating in the mining and extraction industries to amount to up to
EUR 42.3 million EUR (EUR 6.2 million EUR for large companies and EUR 36 million EUR
for SMEs). The total additional cost for EU companies operating in the textiles industries
are estimated to amount up to EUR 110 million per year (EUR 3.7 million for large
companies and EUR 107 million for SMEs). The total additional cost for EU companies
that trade, or manufacture food products and agricultural commodities amount to up to
EUR 2.3 billion annually (EUR 56 million for large companies and EUR 2.27 billion for
SMEs).
In regard to “Mandatory DD throughout companies’ value chains”, (sub-option 4.2(a),
large companies’ additional annual cost amount to about 543 million EUR. If new
regulation would be applied horizontally across the EU applying to all businesses (sub-
option 4.2(b), EU companies’ additional cost would amount to about 33 billion EUR
annually. Large companies’ additional annual cost amount to about 543 million EUR.
SMEs’ additional annual cost amount to about 32.5 billion EUR.
Option 4 could also provide significant economic benefits for firms related to their brand
image, reputation and sales, if companies will, as a result of the new regulation,
increasingly implement due diligence activities and these are known by consumers.
Similarly, economic benefits in the area of human resources can be expected as
sustainability measures and CSR activities can make a company more attractive for job
applicants and therefore companies can attract talents even when they do not pay highly
competitive salaries. Economic benefits can also be expected from better risk
management, operational efficiency and innovation. Several studies have found that
sustainability measures by firms have a positive impact on the company risk and
558
operational efficiency which translates into economic value. It can also be expected that
economic benefits for companies arise in the form of better financial or stock
performance and access to lower cost of capital if a new EU regulation requires
mandatory due diligence and leads to improved due diligence measures taken by
companies. Several studies find a positive relationship between companies’ sustainability
activities and financial or stock performance. Other studies also suggest that
sustainability activities of companies can have a positive impact on companies’ cost of
capital.
However, social, human rights, and environmental impacts from option 4 are expected to
be most significant. In fact, while this study is not scoped around the assessment of the
effectiveness of mandatory due diligence on achieving the SDGs, it is notable that the
improvement of the socio-economic-environment situation in countries hosting EU
company suppliers could have an inherent effect towards achieving the SDGs.
The magnitude of the social impacts depends on the application of the new regulation
(the more companies affected, the higher the expected negative and positive impacts),
the social issues which are expected to be addressed and specified by the regulation and
thus to be covered by companies, and the effectiveness of an enforcement mechanism to
ensure the implementation of due diligence practices.
Regulation requiring mandatory due diligence allows for significant preventative benefits
for rights-holders that reporting requirements fail to capture because of their
retrospective nature. Additionally, sector-specific due diligence is expected to have even
more significant impacts as requirements may dive deeper and be designed to be more
context-specific towards the needs of specifically impacted stakeholders. However, even
when due diligence is mandatory, compliance is challenging to monitor and enforce.
Challenges likewise arise from over-reliance on certification schemes when investigating
suppliers beyond a company’s direct supplier. And finally, when it comes to sector-
specific mandatory due diligence, there is a risk of unintended consequences such as de-
facto embargoes of certain local and developing economies that depend on the demand
of a sector-specific product for their livelihood.
Concerning environmental impacts, a common due diligence framework may ease and
improve compliance along supply/value chains. Mandatory requirements likewise provide
higher accountability, and enhanced access to justice in case of adverse environmental
impacts. Arriving at consensus regarding positive impacts across various environmental
areas may indicate receptivity to adopt new approaches to environmental/ climate-
change impact mitigation. However, positive environmental impacts are dependent on
institutional capacities to implement and properly enforce such frameworks. Additionally,
stringent regulations under policy option 4 must be weary not to tip the scale and
incentivize infrastructure development for regulatory evasion (e.g. sourcing from
countries with significantly less stringent regulations compared to the UN Guiding
Principles or the OECD Guidelines, for instance).
559
Table 8.63: Overview of regulatory options and impacts by area
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Op
tio
n 1
: N
o p
olicy c
hange
Company-level costs
No changes
Company-level benefits
Economic benefit expected only if companies
advance due diligence activities on their own
behalf and succeed to communicate these. Then
economic benefits can accrue for brand image
and reputation, human resources, risk
management and operational efficiency, as well
as stock/financial performance or capital cost.
Benefits
Impacts on work
conditions and labour
rights depend on the
development of national
initiatives.
No impact on
employment levels
expected.
Benefits
Existing guidelines
have successfully
began transitioning due
diligence from
retrospective
expressions of regret to
proactive monitoring
and investigation.
Challenges
As the current
landscape is dominated
by guidelines and
voluntary mechanisms,
companies are not held
accountable for
respecting human
rights duties.
Gaps in legal certainty
with multiple standards
in various Member
States, third countries
and industries, ranging
from non-binding to
binding, issue-specific
to general, and
industry-specific to
cross-sectoral. This
leaves companies with
lack of clarity and
rights-holders with lack
of access to remedy.
Challenges
Unclear link between
environmental and
climate-related due
diligence; the latter is
considered as a sub-
aspect of
environmental due
diligence rather than
an explicit priority.
Increasing number of
disputes and
arbitration cases
between governments
and companies
derived from
infringement of
regulations or the
increment of
environmental
protection.
Costs
Initiatives at
national level
and cost for
national
authorities are
difficult to
predict.
Possible
monitoring and
coordination
cost for EU
bodies could
arise.
560
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Op
tio
n 2
: N
ew
volu
nta
ry g
uid
elines/g
uid
ance
Company-level costs
No significant changes
Company-level benefits
No economic benefits expected, unless (like
under Option 1), companies pursue due
diligence practices voluntarily or due to national
requirements.
Benefits
Very small or no impact
expected on work conditions
and labour rights unless
companies take voluntary
actions.
No impact on employment
levels expected.
Benefits
Voluntary guidelines
raise awareness and
provide rights-holders
with a benchmark
against which to hold
companies
accountable.
Challenges
Voluntary guidelines
risk being exploited by
companies that
advertise to be in line
with guidance but take
no steps to implement.
Voluntary guidelines
lack enforcement
mechanism and rely on
a company’s
willingness to respect
human rights.
Challenges
Unequal situation for
companies (and
countries) regarding
their commitment to
reduce
emissions/potential
harms to environment.
Companies’ vigilance
plans potentially
insufficient to address
adverse impacts.
Increased operation
costs deter larger
efforts.
Costs
Possible
personnel costs
could arise for
the promotion
of new
guidelines
throughout the
EU (0.05
FTE).1497
1497 A “full-time equivalent” (FTE) is equivalent to one employed person working on a full-time schedule.
561
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Op
tio
n 3
: N
ew
regula
tion r
equirin
g d
ue d
ilig
ence r
eport
ing Company-level costs
Total of additional annual internal labour
cost for EU28: EUR 2.44 billion EUR.
Total annual cost incl. labour cost, overhead
and costs of outsourced activities / audits for
EU28: EUR 3.5 billion.
Company-level benefits
Similar to Option 2, economic benefits
depend on the extent to which mandatory
reporting requirements enact changes in
companies’ policies and promote the taking of
actions.
Benefits
Small impacts on work
conditions and labour
rights possible if
mandatory reporting
requirements lead to
improvements in due
diligence practices and
company policies.
No impact on
employment levels
expected.
Benefits
Even if full
transparency is
challenging, reporting
requirements raise
awareness among both
companies and
stakeholders and
provide leverage for
rights-holders to
demand information.
Challenges
Compliance with
reporting requirements
is challenging to
monitor and enforce.
Companies may
perceive reporting and
disclosure activities as
procedural rather than
substantive.
Difficulties in
monitoring disclosure
activities for the
informal sector.
Opportunities
Enhanced identification/
assessment of
existing/potential
adverse environmental
impacts within
companies.
Increased visibility and
transparency of
climate-related due
diligence.
Common environmental
due diligence
framework for
companies to
understand what is
expected of them.
Challenges
High uncertainty about
impacts in specific areas
(eg transport).
Low levels of
enforcement /lack of
sanctions for non-
compliance, legal
liability or access to
remedy.
Costs
The creation and
maintenance of a
database for
company reports
could create
additional costs (5
FTEs).
562
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Op
tio
n 4
: N
ew
regula
tion r
equirin
g m
andato
ry d
ue d
ilig
ence Company-level benefits
Expected benefits depend on the coverage of
companies and enforceability of required due
diligence measures as described for sub-options.
Benefits/Costs
Social impacts are expected
to be highest if mandatory
due diligence is required.
There could be negative (if
the economic burden for
companies is high) as well
as positive impacts on
employment levels
(resulting from an
increased demand for
specialised staff).
Benefits
Regulation requiring
mandatory due
diligence allows for
significant preventative
benefits that reporting
requirements fail to
capture because of
their retrospective
nature.
Challenges
Even when due
diligence is mandatory,
compliance is
challenging to monitor
and enforce.
There are currently few
cases of due diligence
requirements to
provide comparative
information about
potential impacts.
Reliance on
certification schemes
when investigating
suppliers beyond a
company’s direct
supplier.
Opportunities
Common environmental
due diligence framework
may ease and improve
compliance along
supply/value chains.
Enhanced accountability
and access to justice in
case of adverse
environmental impacts.
Consensus about positive
impacts across various
environmental areas may
indicate receptivity to
adopt new approaches to
environmental/ climate-
change impact mitigation.
Challenges
Institutional capacities to
implement/enforce
environmental due
diligence may be limited.
Stringent environmental
regulations may increase
avoiding compliance (e.g.
relocation to “pollution
havens”).1498
Costs
Same costs
expected as for
Option 3 plus
additional costs as
described per sub-
option.
1498 Candau, Fabien, and Elisa Dienesch. 2017. "Pollution Haven and Corruption Paradise". Journal of Environmental Economics and Management 85: 171-192. doi:10.1016/j.jeem.2017.05.005.
563
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4.1
: N
arr
ow
cate
gory
of busin
ess (
lim
ited b
y s
ecto
r) Company-level costs
Total additional cost for EU companies operating
in the mining and extraction industries to
amount to up to EUR 42.3 million EUR (EUR 6.2
million EUR for large companies and EUR 36
million EUR for SMEs).
The total additional cost for EU companies
operating in the textiles industries are estimated
to amount up to EUR 110 million per year (EUR
3.7 million for large companies and EUR 107
million for SMEs).
The total additional cost for EU companies that
trade or manufacture of food products and
agricultural commodities amount to up to EUR
2.3 billion annually (EUR 56 million for large
companies and EUR 2.27 billion for SMEs).
Company-level benefits
For individual companies benefits from an
enhanced reputation and for human resources
are expected to be rather small, but potential
significant benefits associated with reduction of
reputational risks associated with current status
quo.
Economic benefits for risk management,
operational efficiency and innovation as well as
financial/stock performance are expected to
remain same as for Option 4 generally.
Benefits/Costs
Social impacts depend on
the size/number of sectors
to which the regulation will
be applicable: the larger the
number of companies
affected, the higher the
potential benefits for work
conditions and labour rights.
Similarly, the higher the
number of affected
companies, the higher is
potentially the number of
additional jobs created in
CSR. However, possible
negative effects can also be
higher if a resulting
significant economic burden
leads to reduced production
and lower demand for
labour in many companies.
Benefits
Rights-holders benefits
may be seen more
significantly as
requirements may dive
deeper and be more
specific.
Challenges
However, there is a
risk of unintended
consequences such as
de-facto embargoes of
certain local and
developing economies
that depend on the
demand of a sector-
specific product for
livelihood.
See sub-section on
environmental impacts
Costs
Costs would arise
for personnel at
Member State
level in
designated
control bodies
(estimated at 1.5-
2 FTE per MS).
564
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4.2
: H
orizonta
lly a
cro
ss s
ecto
rs
Company-level costs
If new regulation would be applied horizontally
across the EU, EU companies’ additional cost
would be highest for Option 4, amounting to
about EUR 33 billion annually.
Company-level benefits
Expected benefits depend on the coverage of
companies as described below.
Benefits/Costs
Social impacts depend on
the coverage of affected
companies as discussed
for sub-option 4.1.
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs
Cost to set up
structures and
processes to
monitor the
implementation
are expected to
be similar as for
Option 4.1
Expected
operating costs
for sub-options
4.2(a) to 4.2(c)
will depend on the
number of
affected
companies.
565
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4.2
(a):
Set
of
larg
e c
om
panie
s
Company-level costs
Large companies’ additional cost would be
highest for Option 4, amounting to about EUR
543 million.
Company-level benefits
The extent of economic benefits from
enhanced brand image and reputation and
human resources depends on the number of
affected companies: The fewer companies are
affected, the more likely are reputational and
human resource-related benefits for the
individual company.
Potential benefits associated with reduction
in reputational risks present in current status
quo.
Benefits/Costs
Less social benefits
are expected for work
conditions and labour
rights expected than for
sub-option 4.2(b) since
this option applies to a
smaller subset of
companies (see also
explanations for sub-
option 4.1). Similarly,
possible positive and
negative employment
impacts are expected to
be lower than for sub-
option 4.2(b).
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs
The potential
costs depend on
the number of
affected
companies (large
companies
account only for
1% of EU
companies).1499
1499 Eurostat (2018). Statistics on small and medium-sized enterprises. Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php/Statistics_on_small_and_medium-sized_enterprises.
566
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4.2
(b
):
All b
usin
ess,
inclu
din
g S
MEs Company-level costs
If new regulation would be applied horizontally
across the EU, EU companies’ additional cost
would be highest for Option 4 requiring,
amounting to about EUR 33 billion annually.
Company-level benefits
Benefits may be lower if the regulation is
applied EU-wide as individual companies lose
their competitive advantage from reputational
effects vis-à-vis other companies.
Risk management, operational efficiency
and stock/financial performance benefits are
expected to remain the same as generally for
option 4.
Benefits/Costs
It is expected that positive
impacts for work conditions
and labour rights would be
highest if due diligence
requirements apply to all
companies.
Similarly, positive and
negative impacts on
employment levels are
expected to be most
significant if due diligence
requirements apply to all
companies.
See sub-section on human
rights impacts.
See sub-section on
environmental impacts.
Costs
It is expected that
this option will
create higher
costs than sub-
option 4.1 as it
applies to more
companies.
The costs for
setting up
structures and
processes are
expected to be
similar as for sub-
option 4.1, but
the operating
costs for
monitoring and
coordination are
expected to
increase with the
number of
affected
companies.
567
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4
.2(c):
All
busin
ess
plu
s
specific
additio
nal
obligations o
nly
apply
ing t
o larg
e c
om
panie
s
Benefits/Costs
This option could
increase impacts on
work conditions and
labour rights compared
to options 4.1, 4.2(a)
and 4.2(b) depending on
the specification of the
additional obligations.
It could also increase
impacts (positive and
negative) on
employment levels since
large companies would
be subject to increased
due diligence
requirements (leading to
more labour demand in
CSR) but also a
potentially higher
economic burden from
compliance.
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs
The cost of
monitoring
additional
obligations
depends on the
type of
obligations and
the resulting
requirements
for additional
staff and/or
additional
processes and
structures.
Su
b-o
pti
on
4
.3:
Sta
tuto
ry
overs
ight
and/o
r enfo
rcem
ent
Company-level benefits
Enforcement mechanisms are expected to
increase compliance and as a result credibility
of companies’ due diligence activities. This
could potentially increase economic benefits in
all discussed areas.
Benefits/Costs
An enforcement
mechanism could
increase companies’
compliance and the
likelihood that the
expected social impacts
come into effect.
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs
This option could
create significant
additional costs
for public
authorities and
the legal systems
in EU Member
States, depending
on the design of
the enforcement
method.
568
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4
.3(a):
Mechanis
ms fo
r
judic
ial or
non-j
udic
ial re
medie
s
See discussion under sub-options See sub-section on social
impacts
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs
The
additional cost
of this option
depends on
whether
existing judicial
or non-judicial
structures can
be used or new
bodies and/or
processes need
to be
established.
569
Economic Impacts Social Impacts Impacts on Human
Rights Environmental Impacts
Impacts on Public
Authorities
Su
b-o
pti
on
4.3
(b
):
Sta
te-b
ased o
vers
ight
body a
nd s
anction f
or
non-
com
pliance
See discussion in sub-section See sub-section on social
impacts
See sub-section on human
rights impacts
See sub-section on
environmental impacts
Costs for public
authorities
Costs for a new
body expected to
be higher compared
to financing
additional staff
within existing
institutions.
Additional costs
expected for
training and expert
staff.
An oversight and
enforcement body
in each EU Member
State would imply
significant
additional costs.
Income through
fines paid to public
authorities may
cancel out costs.
570
571
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